United’s Champion of Growth Must Shrink Airline in New Role as CEO

(Bloomberg) -- As president of United Airlines Holdings Inc., Scott Kirby won over skeptical investors by pulling off an aggressive expansion plan. As chief executive officer, he’s up against an entirely different challenge.

Kirby, who takes the reins Wednesday from Oscar Munoz, faces the prospect of cutting thousands of jobs just months into his tenure. While all airlines are suffering, United’s leadership duo has been particularly blunt in telling employees that pain lies ahead because of the unprecedented revenue drought caused by Covid-19.

“There are going to be things that we obviously wish we didn’t have to do,” Kirby, 52, said in an interview. “My No. 1 goal as CEO right now is to save as many of the jobs as possible at United for the long term. But it’s for the long term. And that means we are going to have to make hard decisions in the short term.”

In other words, the brash executive who forged his name with a focus on growth is now in charge of shrinking United Airlines to survive the fallout from a deadly pandemic. Already, the carrier has stood out among U.S. rivals for the dire warnings it has issued since the early stages of the coronavirus outbreak. Kirby has even said United is preparing for a scenario of minimal sales until next year, while being careful to say that the company isn’t forecasting that.

“Scott wanted to grow United,” said Sara Nelson, a flight attendant at the company since 1996 and president of the Association of Flight Attendants, which represents 25,000 attendants at the carrier. “I think it’s probably killing him that he can’t do all that. And now, what he has to do is to spend a couple of years very carefully cutting the network.”

Worst Drop

Kirby is formally assuming the CEO role after serving as United’s president since 2016. An Air Force Academy graduate who as a younger man was banned from casinos for counting cards, Kirby jumped to United from American Airlines Group Inc. after years as the No. 2 executive to CEO Doug Parker.

Munoz will become United’s executive chairman after forging a turnaround in the years before the coronavirus crisis devastated the industry. Brett Hart, the company’s longtime general counsel, has been named president.

United has tumbled 73% this year, the worst among the five biggest U.S. carriers. The shares sank to a seven-year low last week before rallying amid broad market gains spurred by optimism for a coronavirus vaccine.

United’s aggressive rhetoric “reflects the fragility of the situation,” said William Swelbar, an aviation consultant and a director of Hawaiian Holdings Inc.

For the three U.S. legacy airlines -- United, American Airlines Group Inc. and Delta Air Lines Inc. -- the crisis represents “15 years of balance sheet repair gone in less than 60 days,” Swelbar said in an email. In the longer term, depending on passenger demand, “there just may not be enough business travel to support the lifelines of the Big Three.”

Congress and the Trump administration have provided a $50 billion lifeline for airlines. United got about $5 billion in payroll support and could borrow another $4.5 billion from the government.

The Chicago-based airline and other U.S. carriers are seeing faint signs of a rebound, suggesting that demand bottomed in April. But travel demand isn’t likely to roar back. That means that even in an upbeat scenario, the industry is in for a long, slow recovery.

‘More Realistic’

“What I would say is we had a more realistic tone,” Kirby said, referring to United’s recent communications with employees. “In fact, we weren’t nearly dire enough compared to what happened. And particularly as I was moving into the CEO role, it was an opportunity to encourage the team to view the world as it is instead of how we wished it was.”

United projects operating about 25% of its 2019 schedule in July, up from about 12% in May. But it will cancel flights if demand doesn’t materialize.

To reduce costs, United has slashed contractors, offered employees voluntary leave programs and told management and administrative staff that at least 30% of them will be cut in October. It has prepared 4,500 pilots for transfers to new, smaller aircraft -- and lower incomes. Senior officers have taken a 50% pay cut and all managers are required to take off 20 days unpaid before October.

An effort to move 15,000 employees to part-time status, or 30 hours a week, prompted a lawsuit from the International Association of Machinists and Aerospace Workers. The union withdrew the suit after United relented and offered a new program to entice workers to accept fewer hours while retaining full-time status.

Layoff Risk

As CEO, Kirby will now confront the potential need for mass layoffs, at least once the restrictions on such cuts expire Oct. 1 under the terms of the U.S. aid package.

The depth of the culling depends on demand trends. United has trimmed its daily cash burn to about $45 million and says it can take that to $20 million by year-end with fewer workers.

Nelson, the union leader, said United reacted faster than others partly because of periodic crises that had beset the company in recent years. That list included Munoz’s efforts to complete the carrier’s merger with Continental and sign contracts with labor groups.

Then there was the effort to address United’s worldwide shaming that came with episodes of a passenger being dragged off a plane and a puppy that died after being placed in an overhead luggage bin.

“They’ve had more training than any other airline these past several years in how to address crisis,” Nelson said. “Although this one is incomparable in size.”

©2020 Bloomberg L.P.