As one of the largest international carriers, U.S.-based United Airlines marked a new beginning last year, emerging from bankruptcy protection which began in 2002. After enduring a painful restructuring, the airline is greeting a new era, approaching its passengers as a leaner, more cost-efficient company.
Despite near-record oil prices and multiple discount competitors, UAL Corp. (Nasdaq: UAUA), the holding company whose primary subsidiary is United Airlines, reported for the second quarter which ended June 30 that generated $274 million in net income. It also generated a company record for sales: $5.2 billion in quarterly operating revenue.
We certainly are on our way up, says David R. Ruch, the airline's General Manager and senior company representative for Korea. The airline is relatively well-hedged and its presence in Asia - a lucrative market essential to the carrier's overall recovery - gives it a big advantage.
Still, controlling its costs and boosting revenue in the rocky airline industry remains a constant challenge.
In a wide-ranging interview last week with The International Business Times, Ruch spoke about the survival tactics used by United and the airline industry to emerge from a trying period in the post 9/11 world as well as the carrier's general outlook for 2007.
He also touched upon the positive effects of a possible reduction in South Korea-U.S. visa restrictions, as well as improved trade and the strength of airline partnerships to provide more seamless international travel to Asia and beyond.
[Editor's note, August 2: The following integrates excerpts from the original interview and Mr. Ruch's e-mail amplifications of certain statements.]
IBT: How does 2007 look overall? There seems to be some operating profit despite still high fuel prices.
Ruch: 2007 is looking quite encouraging but when we say encouraging, we have to put it in context of what this industry has gone through over the past ten years. The world aviation industry since the start of commercial aviation has barely broken even. When you take the cumulative net profits that the industry has generated in the past 50 years, and you take the cumulative net looses, it's barely a break even proposition. And when you look at the cost of capital and the capital intensive nature, this business has not been compensatory for the amount of investment that's required to operate an international airline. So when we take a look at where things are right now, we seem to be in a fairly strong economic cycle. We don't ever like to think we are at the top of the rollercoaster but we certainly are on our way up, and as typical of any rollercoaster, one day, this cycle will change. I think what you have seen now, the airline has come from a very deep trough cycle where everything has gone wrong. The economy, confidence in air travel because of terrorism, high cost of fuel, high cost of labor, everything that could happen has happened in the past 5 years and it has placed the industry, particularly the US industry, in to wide scale bankruptcies. What is emerging today is a much leaner, a much more efficient industry. I think now that the economic cycle is returning upwards, with most of the worldâ€™s economies starting to fire on all cylinders, the demand side of the equation is quite strong. Even with the cost of fuel at record highs, we are seeing much better efficiencies in almost every part of the operation. It has really been the result of survival tactics. Every airline has virtually re-engineered itself. So, things are looking better, but having said that, we never expected to see $70 oil and now it's moving towards $80. This is going to be a constant challenge for us to squeeze further efficiencies from the operation in an environment of fluctuating supply and demand.
IBT: United currently offers San Francisco-Incheon service. Do you know of any plans for expansion such as adding more flights or even tapping in to new, direct routes between the two countries?
Ruch: I think the aviation agreement between United States and Korea is open skies so there is no restriction as to who can fly what. It's purely an economic decision that is based on the fair structure and the demand. Right now, here in the Korea market, we are in a demand constrained environment as far as travel to the United States is concerned. We believe that the visa requirement placed on the Korean travelers to the U.S. really constrains demand quite a bit making it very risky to invest in building a much larger network when your demand side is constrained. So, there are a couple of things we see happening. First, the free trade agreement between the US and Korea has now been signed at the executive level but it has to go through the legislatures on both sides before it can be enacted. We are looking very optimistically at this as we think it's a win-win situation. Ninety-four percent of all the consumer and industrial products flowing between the US and Korea, will move duty free within 3 years of enactment. Aside from a substantial jump in the trade of goods and services, we see a major halo effect in passenger traffic flows, as cross border investment increases and consumers develop an appetite for American products, culture and destinations. So that is going to build demand and we think that that in itself will cause corporate investment. US investors will invest more in Korea and figure out how to get a piece of this market and the Koreans vice versa. Overall, we think the FTA will be a big long term stimulus. But for us, the real key to market growth is the status of Koreaâ€™s entry into the US Visa Waiver Program. The legislation modernizing the Visa Waiver Program is now awaiting President Bushâ€™s signature. Once passed and the logistics to incorporate Korea into the program are complete, we think that this market could double in 12 months, and at that point in time, when you have an un-constrained supply side and un-constrained demand, it makes more sense to expand your network. One of the things we see is that Koreans have tended over the years to concentrate their visitation on parts of the United States that are centers of Korean business, investment and residence. With almost half of the 2 million ethnic Koreans living in the US split between California and New York, these two coasts have historically received the highest proportion of Korean visitors. today, we're seeing big changes to those demographics. We are seeing Hyundai and Kia putting manufacturing plants in the South East. We see Samsung putting chip plants in Texas. So there is great diversification going on geographically. As these Korean corporations invest in the US, the cost to [manufacture] in the U.S. in some respects is cheaper than it is here. Hence, with the US being such a huge demand market for Korean products, many Korean corporations have made the decision that they need to be in the United States to manufacture as well. And so with this diversification, we now see Korean travelers branching out and traveling to all 50 states. And that's really the strong point of United. We are the second largest airline in the world, the largest airline across the Pacific and we have a North American network that is really unsurpassed. Our strength is our ability to connect our Asian and interior U.S. networks without our passengers ever having to change airlines.
IBT: Now, with FTA passed on the executive level, do you expect to see an increase in the number of competitors in the near future?
Ruch: It's natural that we will see more US competitors come in. We are the only US carrier - other than Delta who has just started in May - that operates non-stop services into Korea. We presume that once the visa waver happens, some of our competitors will start services in here.
IBT: What are the strategies United will use to pursue growth in this demanding Asian market?
Ruch: One of our network's strength is our west coast hubs. We don't have any real competitors in the U.S. that have as much strength on the West Coast as United. With the west coast being so trade centric on Asia, this positions us quite strongly in the business market. When we take a look at our competitors, whether it be American, Delta, North-West, or Continental, none of those players have the West Coast strength of United. To a certain degree, that gives us a competitive advantage because a great deal of this market still travels into the West Coast. Korea, as with many other parts of Asia is very west coast centric. California will always be a big destination market, but with our hubs in San Francisco and Los Angeles, we offer greater connectivity into the interior US than most of our competitors. I think our strategy is to really take advantage of our strong West Coast presence and serving the interior through these gateways with a single, seamless product.
IBT: Is United launching any new product soon?
Ruch: We have a new product that we launched today in the States. It's a new International premium product. We will be putting 180 degree, lie-flat seating in all of First Class and Business Class cabins on all our trans-continental and trans-oceanic airplanes. We are in the process now of modifying all 97 of our 747s, 777s, 767s. We are removing seats from first and business class to allow us to put lie-flat seats in. The difference between our product and the rest of the industry is a matter of degrees. While many of our competitors claim lie flat seats, they are in fact angled- sometimes by as much as 145 degrees. Our seats are fully flat- 180 degrees which makes a huge comfort difference, particularly on a 10 hour flight. Admittedly these improvements have been a long time coming. The U.S. airlines, after 9/11, have not invested in hardware, mainly because we were all fighting just for survival. This is the first time we have really made a major change in our product in over 15 years now. What's unique about United is first of all, we're one of the few airlines that still have first class service everywhere we fly. If you look at most of our competitors, particularly the American competitors, most of them pull first class off in the long flying however this is not the case for domestic flying. We already have first class everywhere we fly. Now with the addition of lie-flat beds, we will have even more significant product differentials to our competitors.
IBT: What do you see in the future for United Airlines in Korea?
Ruch: We have been in Korea for 30 years, and I think we are one of the few carriers that have kind of been through everything, through good times and bad, so we are very much committed to staying in the market. We are a founding member of the Star Alliance, and Asiana Airlines is our lead Star partner here in Korea. So I think that what you will see in the future, particularly with the globalization in the industry, is that these alliance families are going to look like a real single unit family over time. When we take a look at our partnerships here, we probably will be doing much more jointly with Asiana down the road in the future. Trying to be the single airline that flies everywhere in the world is an impossible task and it's also not economically viable. We have a huge North American and South American network and our objective is to bring people over here to Korea, and then cross connect to our partners whose strength is in their Asian networks. I think you will see joint activities of that type occur much more seamlessly than they had in the past.
IBT: So the co-operation between the Star Alliance airlines in this region is working out pretty well?
Ruch: I think when you take a look at markets like Tokyo, this time last year, we moved all the Star carriers in to one terminal in Narita. If you take a look at that terminal, it starts to look like more singular Star Alliance operation than individual airline operations. We share the same lounges, same facilities, and we are able to transfer people in much less time. So if you are going from one part of the world to the other, you don't have these long connecting times, or terminal changes. You are able to move much more quickly. You have seen this in Frankfurt â€¦ obviously. United and Luftansa do quite a bit together over the Atlantic. In Europe Lufthansa takes the lead and in United States, United takes the lead. We will be working more together with Lufthansa as years go by and we expect that kind of evolution to occur in markets like here with Asiana. It's happening now in Tokyo with our partner with ANA. I think you will see much more consolidation going on, maybe not mergers of airlines, but certainly a blurring of boundaries between alliance partners.
IBT: What is your message to your staff and passengers here in Korea?
Ruch: I think that the message [is] we have been through heavy turbulence. From the employee standpoint, the employees have suffered along with the airline, in terms of wages, benefits, working conditions, and having the tools they need to do their job. When the airline is capital constrained, the immediate responsibility is to make sure that the operation is operating safely and the schedule is maintained. Everything else comes secondary. So now that the economics of the business have changed, I think that you're seeing more investment similar to what we are seeing in the product. Now we are trying to basically be more responsible and give what people need to kind of do their job. Same thing for our passengers. Flying these days is not like it was 15 years ago. It's extremely stressful and to a great degree much of that stress is outside the control of the airlines. The security environment that we have to operate under today is extremely intense and it's not consumer or passenger friendly. It's not airline friendly. So we're all having to get used to new procedures on carry-on bags and going through customs and security, amongst other things. Part of our investment is to look at the customer experience to figure out how to comply with these requirements for these safety purposes, and at the same time, better organize things so it's less stressful for the passengers. We are trying to do is change the customer process at the airports as well to make it easier for passengers to get through the system, the security, check bags and check in. We are not talking about compromising in what we have to do but we are trying to figure out a better way to do it. And so when we look towards the future, from an employee standpoint, we're investing in the tools that our people need to do their job and rewarding them according to results.
David R. Ruch became United's General Manager for Korea in August of 2005. He is the senior company representative in Korea, responsible for sales and marketing, daily operations, as well as government, community and industry relationships. He was the former head of the Lacek Group-Korea, a division of OgilvyOne, where he specialized in the airline and hospitality industries. Ruch has 18 years of airline operational experience and has worked in Asia for 22 years.