United Airlines' bankruptcy and competitive failure in the airline industry

Navigating Through Economic Turbulence: A Case Analysis of United Airlines

On December 4, 2002, United Airlines entered a very dark period of their history when the company announced Chapter 11 bankruptcy. The case begins with CEO Glenn Tilton on his way to Chicago to announce the specifics of the bankruptcy and meeting with the key stakeholders of the company. These stakeholders have the power to completely re-order the United Airlines business model in the days following the bankruptcy filing. They are comprised of stockholders (both individual investors and institutions), suppliers, Wall Street analytics and the creditors the company owes payments to, and United's partners in the Star Alliance of code-sharing programs. While the case study is downbeat and shows just how far out of touch the airline is with its value chain, one of the most redeeming aspects of United's situation is their strength at partnerships an alliances (Sjogren, Soderberg, 2011). The en masse adoption of low-cost airlines and a completely different business model focused on standardization over customization is pervading the airline industry and was in full motion in 2002 as well (Pereira, dos Reis, 2011).

Statement of the Problem

Of the myriad of issues in the case study, at the center of all the chaos United is dealing with is the lack of connection with their value chain. Whenever a low-cost or more process-efficient business model begins to affect a long-standing value chain, the race is on for disintermediation of legacy business models (Markides, Oyon, 2010). Strip away the many related and chaotic problems with their financials, the lack of consistency in their pay structures, and the unwillingness to change their route structuring all are paradoxically pushing United into being more anachronistic and out of touch with the rapidly changing value chain of this industry. The case study shows how United Airlines continue to follow the growth progression of the airline industry without ever considering how they could transform it to be more competitive at the process level. In essence, United was lock-step with the industry and failed to realize that time was running out to break out and disintermediate supply chains, logistics, and more sacred to United, their hub-and-spoke business model. In the meantime, Southwest Airlines and other low-cost carriers on a regional basis were disintermediating the supply chain with strong success (Berghel, 2000). United is completely out of step with the cost structures, evolving changes to airline business models that are re-defining the industry, and blames the massive financial losses for these inefficiencies instead on the September 11, 2011 terrorist attacks. Careful analysis of the case financials shows that United was actually plummeting in value even before the attacks, and these events served to be a catalyst of greater industry transformation than anyone anticipated (Markides, Oyon, 2010). In effect the drastic reduction in travel just showed the many vulnerabilities in the industry that the case study shows in detail.

Learning Application

There are many opportunities for learning in this case analysis. Foremost is the ability to see how rapidly a business model shifts over time, and with it, the entire value chain of an industry (Porter, 1986). United has chosen to ignore all the earning signs that their grip on their own value chain is slipping away, and with it, the level of ROIC they can generate over time. They are also seeing that the industry value chain itself is going through several disruption and disintermediation (Markides, Oyon, 2010). Again United failed to see this as well. As a result, the only hope for United is to concentrate on what they do best, which is completing in multi-hub markets and long-haul markets and trim back all other unnecessary businesses. As for the salaries and the wage disparities, United will need to eventually hire the next generation of pilots at salary levels more consistent with industry standards to alleviate the massive wage disparity.