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Thursday
Feb182010

Patience and Perseverance: Tilton Walks It Like He Talks It

There is no way to describe United Airline leader Glenn Tilton other than resilient.  He is disliked internally by organized labor and questioned externally by nearly everyone who has an eye on this industry.  He has taken his role as the industry spokesperson seriously, perhaps more seriously than anyone before him.  We listen intently to Giovanni Bisignani, the CEO of IATA.  But we do not listen enough to Tilton. Why? Because Tilton’s is a message of change not cluttered by this industry’s history, and some people don’t like the message.

Tilton was quoted shortly after United ended a three year stay in bankruptcy: “If I were able to draw a visual image of the beginning (of bankruptcy) to today, it would be one continuous experience of knocking down internal and external barriers.”  In his role as chief spokesperson for the US airline industry as Chairman of the Board of the Air Transport Association, Tilton waxes philosophical about the barriers that impede the industry’s natural evolution.

I have a long history at United and knew the “old company” well.  United epitomized all that was wrong with the US airline industry prior to its bankruptcy in December of 2002.  One of Tilton’s predecessors as CEO, Stephen Wolf, did some very good things along the way that provided United with its global roots.  But even Wolf did little to address the company’s bloated cost structure and a management bureaucracy that often resulted in paralysis.  For every cubicle in Elk Grove Village, one could find at least one silo. 

Tilton cares less about the history of United than its future.  His history lesson was a short one – whatever structure in place when he arrived in 2002 did not work and therefore needed to be changed.  If Tilton was wed to preserving United’s legacy, then he likely would not have taken the same course in fundamentally reshaping the company. He would not have taken on the pilot union, ALPA, over its actions to disrupt United’s operations – winning an airtight legal victory for management that ranks among the most significant victories in decades.  Rather he would have permitted bad behavior – or paid the pilots to stop behaving badly - just as prior administrations had done. 

Today United is a lot smaller, with a mainline operation 30 percent smaller than it was 10 years ago.  For this, Tilton takes a lot of heat.  As the pilots union watches its ranks diminish, ALPA constantly reminds Tilton that an airline cannot shrink its way to profitability.  This may have been true in United’s past, but on Tilton’s watch growth will only occur if it is profitable growth.  It is hard to envision a day when United will again have 12,000 pilot equivalents on the payroll.

Tilton and others recognize that the industry is still too big.  In the most read Swelblog article to date, Montie Brewer makes a clear case that the industry’s capacity-lead business model is the number one reason why the airline industry will never be profitable over a sustainable period.  Also weighing in on the subject is Professor Rigas Doganis who writes about over capacity in Airline Business.  According to Doganis, the airline industry is inherently unstable and airlines have only themselves to blame for the constant state of oversupply and the downward pressure on fares that result.

Doganis goes on to discuss how airlines are “spasmodically” profitable, quoting Tilton on the fact that the industry has "systematically failed to earn its cost of capital."  This is a fact that has long bothered the former oilman.  In a recent speech to the Wings Club in New York, Tilton raised the industry’s continuing and daunting challenge: “How to navigate to sustainable profitability in light of our financial instability.”

In London he made the point again and differently:  “Volatility and losses have been the norm for this industry, as has our systemic failure to earn our cost of capital and achieve any level of consistent financial resilience. The industry has lost nearly $50 billion worldwide since 2000 and a staggering $11 billion last year alone.”

Tilton at United – From Hands On to Chief Strategist

One can be sure that when Tilton arrived at United in September 2002, he had little idea just how bad things were.  But he would soon find out.  Three months after his arrival in Elk Grove Village, United landed in a downtown Chicago courtroom for more than three years as the company restructured itself.  There were mistakes along the way.  There was some bad luck along the way particularly as it pertained to rising values in the aircraft market.  There was the decision to terminate employee defined benefit plans, which among other things permanently damaged Tilton’s reputation in the labor ranks, but enabled the airline to get the exit capital it needed to start anew.

As United exited bankruptcy protection in February 2006, oil prices were on the rise.  The company restructured itself around $55 per barrel oil – a price that was fast becoming a memory and a bad assumption in the company’s plan of reorganization.  Company performance – operational, financial or otherwise – was nowhere near expectations set based on an entity that had spent three years fixing itself.  For either right or wrong reasons, Tilton kept many of United’s legacy management team around to complete the bankruptcy process.  What he belatedly came to appreciate is that leadership at the company had to change – and change it did.

United mainline is much smaller today than it was the day it emerged from bankruptcy.  Tilton oversaw its downsizing in bankruptcy and continued the work as oil prices climbed.  But he also recognized that he was not the guy to handle the day to day operations. Like any good restructuring guy, Tilton knew to hand over the operation of the company to others on the executive team, particularly  John Tague, Kathryn Mikells and Pete McDonald.

And the plan seems to be finally working.  United is starting to produce some good results.  There might be a lesson here for others in the industry, including the consideration of whether CEOs should delegate the day-to-day functions and concentrate on their role as the company’s chief strategist.  Just as pivotal, in United’s case at least, was Tilton’s decision to focus on tearing down the barriers to change – something all industry CEOs should consider in improving the financial prospects for a once proud industry relegated to underperformance, in part by the stakeholders who benefit from its inefficiency.

Tilton and Government

In one way or another, Tilton delivers the message that “no matter how well United or any U.S. carrier transforms its business, none of us will be as strong as we should be - much less in a position to compete in the emerging global aviation industry - if there's no change to the regulatory environment in which we operate.” Without a coherent U.S. aviation policy that “reverses the bias against airline size and removes the barriers that prevent us from constructive consolidation, U.S. carriers will be unable to compete on a global scale and we risk being marginalized,” Tilton said.

Among the questions for the industry, as Tilton outlined in a talk to the UK Aviation club, is what motivates the protectionists’ view of the industry.  “What is it that they are “protecting? A chronically underperforming industry?” he asked.

Concluding Thoughts

For what it’s worth, I focus on Tilton not because of his work at United but because of the message he delivers and its relevance to the rest of the industry.

As I predicted in my last post, February 2010 has been a significant month for airline news – some of it good and some of it bad like government’s call for slot divestitures in the USAirways – Delta slot swap.  It appears likely that oneworld will get permission to compete on an equal footing with the STAR and SkyTeam alliances.  This is the necessary next step to ensure inter-alliance competition as we think and talk about the industry’s structure going forward.   Tilton is a huge proponent of alliances who quickly recognized that one airline cannot be everything to everybody and that network scope and scale can be economically garnered through partnerships that leverage each member airline’s strengths.

Tilton also remains a proponent of consolidation.  His voice is growing increasingly louder on the subject of cross-border mergers and the flow of capital based his belief that the US and the European Union should move forward on Phase II of a transatlantic agreement and pave the way to permitting cross border commercial activity in the airline industry.  As Tilton noted in his UK speech, “capital is global and doesn't have sovereign inhibitions."

Like him or not, Tilton rarely shies away from stating his views, even at the risk of ruffling some stakeholder’s feathers.  For Tilton, too many people focus on the past rather than the future and what needs removed in order that the industry can continue to evolve. That evolution may continue to prove painful for some in the industry as Open Skies and re-shaped alliances bring new competition all the while presenting new opportunities for agile and nimble operators.

Tilton’s role, like that of the Anderson, Arpey, Smisek , Parker and other airline CEOs, is to serve as agents of that change and find a way to balance the demands and interests of labor, shareholders and other stakeholders that depend on a robust, profitable industry.

 

Note:  I hold stock and options in Hawaiian Holdings, Inc. as a result of my Board position.  I also hold stock in United Airlines accumulated at various points in time since the company emerged from bankruptcy.