United to Cut Domestic Flights

NEW YORK – United Airlines (search), increasingly squeezed by discount carriers in the U.S. market, is cutting back its domestic flight schedule and expanding its international presence in the push to become profitable again.

The change in focus announced Wednesday means the world's second-largest carrier will be offering slightly fewer departures per market in the United States and flying more regional jets as it reduces its domestic capacity 12 percent by March 2005.

International capacity will be boosted by 14 percent as United looks to its more lucrative overseas routes — particularly those to China, Japan and Vietnam — to help it return to profitability after four straight years of losses.

Intent on slashing costs further to try to end its 22-month stay in bankruptcy, United said the moves will reduce overall capacity by 3 percent and shrink its fleet to 455 aircraft by next March, down from 523 in August and nearly 20 percent since 2002.

"Fundamental changes in our industry, including ongoing high fuel costs, intense pricing pressure and continuing overcapacity, demand that we take aggressive steps now in implementing this plan to ensure that United remains competitive," said Glenn Tilton (search), CEO of United and parent company UAL Corp. (search)

With the changes, international operations would account for more than 40 percent of United's capacity and slightly over half of its revenue.

The moves come with United and other large "legacy" carriers continuing to lose ground to discount carriers like JetBlue Airways Corp. (JBLU) and Southwest Airlines Co. (LUV), whose lower costs enable them to offer cheap fares that make little economic sense for the biggest airlines.

"As a legacy network carrier, it makes a lot of sense to put your assets into the international arena" where pricing is more rational, said aviation industry consultant Jon Ash of Global Aviation Associates in Washington. "United has a great international network, so it's a very logical move."

Morningstar Inc. analyst Chris Lozier said it likely will be several years before United faces an international challenge from low-cost carriers, which fly smaller planes and would have to clear regulatory and other hurdles in order to gain access to key overseas markets. He called the airline's change in strategy a good move, albeit slightly overdue.

"If there's one place where they maintain pricing power, it's in the international routes," Lozier said. "They've got plenty of money-losing routes in their domestic network that they can close."

United said it has no immediate plans to drop service to any of the cities it serves and will continue to operate its five U.S. hubs, in Chicago, Denver, Washington Dulles, San Francisco and Los Angeles.

"It's a moderate downsizing of our capacity, spread very evenly throughout the system," United executive John Tague said in an interview.

No specifics were announced concerning flights to be dropped or shifted to regional carriers that operate flights as United Express (search).

"There will clearly be localized impacts, but ... there's no theme to this reduction that impacts one hub or one airport more than another," said Tague, executive vice president of marketing, sales and revenue. He said United has "absolutely no regrets" about launching its discount carrier Ted in select markets this year, saying it will be increasing its fleet to 47 by the end of winter.

Tilton said in a recorded message to employees that the changes, agreed to last week by the UAL board, are being made after management concluded that United's business model is "inherently uncompetitive" when compared to that of low-cost carriers.

"The customer is willing to pay for specific value components of the overall travel experience that is associated with the global network model," he said. "However, we have burdened the model with costs that the customer is neither willing nor interested in paying for."

Tilton said the airline is on pace to achieve $5 billion in annual cost reductions by 2005. While United has not discussed details publicly, as many as 6,000 job cuts are expected to be announced in the coming weeks as part of that effort when it unveils a new business plan.

The Elk Grove Village-based airline slashed labor expenses last year by more than $2.5 billion annually and is working on more than $1 billion in additional cutbacks, in addition to moving toward what it says is the "likely" elimination of its employee pension funds.