The Airline Industry and Its Role in Economic Recovery

Glenn Tilton
Air Transport Association Chairman
and UAL Corporation President, Chairman and CEO
Remarks to the Executive Club of Chicago
December 17, 2009

Thank you, David, for that kind introduction. As David mentioned, connecting with – and being a part of Chicago – is very important to United and to me, personally.

David, as we all know, took over as CEO of ITW from Jim Farrell, who serves as a director on the United board, along with fellow Chicagoans Jim O’Connor; David Vitale, Dick Almeida, John Walker and Rob Krebs.

Our company has a very good board – focused and fully engaged in our plans for the future – which is important for the governance and performance of the company and our role in the communities in which we live and work, such as Chicago.

The Chicago business community stands together on the civic and community front better than any place I have known – and serves as a point of distinction for our great city.

So – I am very pleased to be with you in Chicago -- our hometown – and to have a good number of our management team join us. Many of them sit on civic and nonprofit boards in Chicago and they represent much of what United has achieved these last several years – and what I would like to talk about today.

Being called “Chicago’s Hometown Airline” has to be earned – as do most of the important things in our lives and in our businesses.

It has been six years since I last spoke to this forum, and much has happened to United and our industry – to the economy, our city, state and our country – in those intervening years.

Later in my remarks, from my perspective as chairman of the Air Transport Association, I will speak to the airline industry and its role in economic recovery – and the opportunity presented by Transportation Secretary Ray LaHood, in pulling together an advisory committee to address the significant issues that have historically plagued this industry.

Before I turn to the industry, however, I will focus my remarks on United – our progress and our future.

Earlier this year, United announced that we will move our airline Operations Center to the Willis Tower, bringing some 2,800 jobs into the city center and bringing all of our 13,000 employees in Illinois into Chicago.

And, I am told, this will make United the largest private employer in the city.

Nearly 3,000 jobs are important to Chicago – and creating a state-of-the-art Operations Center is important to United.

We will have the technology and the working space to give us a real-time, comprehensive view, across our entire global network, including our United Express partners in the United States.

Facilitating data and information sharing around the world will, in turn, enable more collaborative and timely decisions for us and our partners from what will be, essentially, “global command central” for our airline.

Last week I flew – on United – from Chicago to Washington to connect on our 777 – painted in our Star Alliance livery -- to our Star Alliance meeting in Brussels.

None of us will have to do that next March when United starts our direct, nonstop flight from Chicago to Brussels; and, once in Brussels, connects on to Africa and other destinations served by Brussels Airlines who we welcomed into Star just last week.

I flew back last Friday from London to Chicago on one of our refurbished 767 aircraft with our new lie flat seating and the best first and business cabin configuration on any U.S. carrier. A great improvement appreciated by customers and employees alike.

We continue to strengthen our global and national service, as we did in October through our partnership with Continental when United brought them into the Star Alliance, adding some 60 destinations to our network, including strength in New York and a significant presence in Mexico and the Caribbean.

Continental moving to Star marks the first time that a major carrier has shifted alliances. It is not easy, nor is it inexpensive to make such a move – but the benefits of the enhanced network of the leading global alliance are significant for all stakeholders.

No one carrier can serve all points on a map. In this industry, alliances are vital – offering our customers shared frequent-flier programs, seamless connections and access to Star and member lounges.

If there were any doubt about the importance of alliances, one need only look to the efforts to recruit Japan Airlines by the two other global alliances: Oneworld and Skyteam. Or, looked at another way, American and Delta competing for the relationship and offering “$1 billion plus” for the opportunity.

Global networks benefit from long-range aircraft, and we congratulate Boeing on the first test flight of their 787 aircraft, which took off from Seattle yesterday.

Last week we announced that United will purchase 50 new aircraft, including 25 787s from our hometown partner, Boeing.

This investment in our company and our future will bring new-technology aircraft to United at just the right time – bringing advances in the in-flight experience for our customers and our employees, making new destinations possible and reducing our fuel burn and emissions by some 33 percent compared with the planes we are replacing.

The terms of these transactions had to meet some very high hurdles in financial returns and flexibility – and, by buying “smart” at the bottom of the business cycle, we secured the very best deal possible for United.

These decisions and others that we will continue to make, have common ground. They advance our position for future success – providing a good financial return to our company and contributing to our long-term success in an extremely competitive industry.

The work our people are doing across the company to consistently improve the fundamental performance of our airline, creates the basis from which to make such strategic decisions and build our business – such as earning the right to buy airplanes.

We are close to finishing first in on-time performance for 2009 – moving from worst to first; characterized by such milestones as our best November reliability performance ever.

We are improving our product, refreshing our Red Carpet Clubs, introducing new food options and making solid improvements on baggage delivery.

We continue to add new destinations, making sure we connect you, our customers, to where you want to fly.

This is important work and our customers are seeing the results, as our improved customer-satisfaction scores demonstrate over the course of the year.

As we mark the end of 2009, each of us in this room will likely look back on the unprecedented financial challenges faced by our companies, our city, state and our country … and the impact on us professionally and personally.

During times of extreme stress, people instinctively are tempted to withdraw and “protect” rather than move forward.

In business, while that may be understandable, it is nevertheless, mistaken. Simply put, protectionism does not work because you cannot “protect” businesses from the reality of global competition.

The essence of business is to be profitable … a goal that has systemically eluded the airline industry, with losses from U.S. airlines totaling some $27 billion since the beginning of 2008 – and losses since 2001 totaling some $60 billion.

In the last 30 years, this industry has experienced 185 bankruptcies.

This must change.

The U.S. industry has lost 160,000 jobs since 2001. Order of magnitude, that’s roughly one out of every three jobs in the last nine years. There can be no job security without sustained profitability.

Recently, the U.S. airline industry experienced what might be described as “a head start” in preparing for the global economic crisis.

When fuel, our largest expense, reached $147 a barrel in 2008 – or more accurately $179 a barrel for jet fuel – our company had no recourse but to take immediate action: targeting new revenue opportunities, cutting costs and reducing capacity, grounding some 100 aircraft – in fact, our entire 737 fleet.

Dramatically reducing our fleet and our workforce was not easy, but it was necessary – as fuel spikes followed by the global recession had a severe and punishing impact on leisure and business air travel.

I have been known to make the point that the airline industry is not for the faint of heart – and I think I made that point the last time I was here.

We have smart, creative, disciplined and resilient people, who are personally willing to “power through” all the challenges that confront us.

Given recent events on Wall Street and their effect on all our businesses, those personal traits I just described may today be attributes required in industries not previously known for their extreme volatility and unpredictability.

Recognizing the seriousness of the systemic failures of commercial aviation, in November Transportation Secretary LaHood convened a meeting of all stakeholders, including airlines, airports, labor leaders, consumer advocates and manufacturers, and is in the process of setting up a federal advisory committee to identify solutions and develop a road map that will address the overall viability of the industry.

Unfortunately, in our industry, each stakeholder has historically advocated very different and seemingly self-serving individual agendas. There has been no consensus or support for common solutions that might address the industry’s overall profitability and long-term sustainability.

Balancing the needs of all stakeholders is probably the biggest single issue we face in order to move forward.

Secretary LaHood is to be commended for providing the leadership and the realization that all stakeholders must participate and move beyond historic inertia.

It has been 16 years since a commission established by President Clinton offered recommendations to address the ailing airline industry … recommendations that were largely ignored.

Not surprisingly, most of the issues and many of the recommendations from that commission remain largely unresolved...

This must change.

There are three main areas within the government domain that are widely held to have the most positive potential impact on our industry.

First: The airline industry believes that we should be able to operate like other businesses. An extreme request, I grant you…

That we not be constrained by anachronistic restrictions that still exist post deregulation, and preclude us from using business tools and options available to other industries for investment, cross-border ventures and consolidation.

At United we have long advocated for open markets, even when we had a preferred competitive position that might be thought at risk – such as the open-skies agreement reached with Japan just last Friday, which was a significant advance and rightly applauded by Senator Dick Durbin as “good for Chicago.”

Second is tax.

Taxes on airlines and our passengers have hit an all-time high. Taxes by airports, the Federal Aviation Administration and the Department of Homeland Security represent as much as $60, or 20 percent, of a $300 domestic round-trip airline ticket.

America’s aviation sector and our customers shoulder a federal tax burden that is typically higher than the amount the alcohol and tobacco industries pay. The extreme and unfair tax burden on commercial aviation and our customers should be reduced.

Obsolete infrastructure is the third.

Air traffic control infrastructure was cited as inadequate and a priority by the commission in 1993 – and it certainly will continue to be more so in 2010 and beyond.

The government must accelerate and fund the FAA's "next-generation" air traffic control system.

We have the technology that will transition America from a ground-based system to a satellite-based system that will result in fewer flight delays, together with fuel and environmental benefits – by enabling airplanes to travel more safely and efficiently through the nation's airspace.

Mayor Daley has been a strong advocate on behalf of the aviation industry. In his letter to President Obama earlier this year on the topic of investment in aviation, he said, and I quote:

“This is an industry that we in this global marketplace should not take for granted.”

The service the airline industry provides is directly linked to the economic health of our nation and to the cities and communities we serve. We enable commerce and tourism, we create jobs, connect small communities and large cities to the rest of the world. We contribute 8 percent of global GDP.

As Mayor Daley and the city of Chicago know well – a viable and strong aviation system, with well-run airports, are fundamental for business development and for cities to successfully compete.

That is true for Chicago and every city in the country – ever more so as the world gets flatter and competition has fewer and fewer geographic boundaries.

Chicago’s O’Hare remains a world-class airport with the opening of the new runway last year – significantly improving performance. We will continue to work closely with the city and Mayor Daley so that O’Hare is an airport that works for us all – and meets the future needs of our city, our customers and the businesses that depend on transportation of people, goods and services.

At United we are focused on doing the work to ensure that we can be profitable and sustainable, provide more job security for our employees, and invest in the products and services that our customers need – and successfully compete with the best global airlines.

Maintaining the advances in capacity discipline, made across the industry in times of difficulty, will be critical to our collective profitability and our sustainability as the economy improves.

This challenge is set against a backdrop of an industry has an appalling record of self-destructive actions that compound the problems of a quasi deregulated and an overtaxed industry that I spoke to previously.

This must change.

We cannot make any decisions of convenience that will prove to be unsustainable as the business cycle evolves.

Nor can we create prosperity and employment opportunities that are not earned by profitability.

At United, we will continue to be disciplined in our decisions … we will continue to partner with others in government and in the communities we serve.

I am pleased that Chicago is our home – proud that many of our leadership team have joined me today – and I will close by saying:

We agree with our mayor. Commercial aviation should not be taken for granted.