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Saving United through Cultural Revolution

As I see it, major carriers have two sources of success – route network and culture – because these two “assets” are the only ones that are hard to acquire or build. Route networks with strong hubs and ubiquitous market coverage allow carriers to capture lucrative business travelers who seek to consolidate their travel on a single carrier (for mileage bonuses and corporate discounts). But building a strong network is not easy because their components are often unique things that only one carrier can own – i.e. most airports can only have one dominant hub carrier, foreign carriers can only be alliance partners for one carrier, slots at La Guardia are finite, etc.

A strong culture can offer benefits throughout the organization to the extent that it can generate sustained employee effort, loyalty and trust. An airline with high trust between labor and management usually enjoys better customer service, because front-line workers are more motivated to solve problems, and higher productivity -- through employee-initiated problem-solving teams, more flexible labor contracts, and quicker contract negotiations. Strong culture is the key not only to Southwest's astounding outperformance of its rivals, but also to the above-average performance of Delta and the stunning turnaround at Continental since 1994. But like a route network, a strong culture can't be bought, it must be built.

United is actually in a strong position on route network ... but in a terrible position in terms of culture. For many years, United -- and American -- have been able to overcome their poor organizational cultures with dominant networks. United's ill-fated attempt to acquire US Airways was an attempt to strengthen its position further – filling in the weakest link in United's global network, the U.S. East Coast. However, not only did this not address United's real problem, but the cost and distraction merely exacerbated the cultural malaise at United. So, the high leverage solution at United is to launch a cultural transformation to turn labor-management distrust into cooperation.

What would this entail? It isn't necessarily rocket science nor cultish mumbo jumbo. I can suggest at least three major steps. The first would be to adopt many of the policies and practices that characterize strong culture airlines: frequent and substantive communication between management and employees at multiple levels; policies that apply to all employees equally to foster inter-occupational cooperation and firm-level loyalty; and performance-based bonuses.

The second step is the probably the hardest – and most essential. It entails changing the informal “rules of the game” that drive managerial attitudes and behavior. To understand this, it is helpful to give an example of good culture vs. bad culture: at Continental, all employees who have a perfect attendance record for six months are entered into a drawing for eight Ford Explorers. The Explorers are the top-of-the-line Eddie Bauer edition and the company also pays the taxes and license fees so that employees can take them home with no strings attached. United imitated this policy, offering trucks ... or a cash prize. But employees always opted for the cash because the company didn't cover the incidental fees to make the trucks seem like a worthwhile prize. Subtle differences like this demonstrate the difference in “effort” and “care” that Continental managers put into the business of managing people, relative to those at United.
Accomplishing step two will require two related efforts. First, managerial compensation and promotion must be tied in part to explicit measurement of a manager's teamwork and cooperativeness. Second, the management ranks must be purged aggressively, both to weed out low performers – in terms of either operational performance or teamwork performance – as well as to renew employee confidence in both the integrity and competence of the management team as a whole. This is the action that did not happen when United became majority-owned by employees in 1994. There was much talk of a new culture but little action to change the way management operated.

Third, the structure of United's employee-ownership arrangements – the ESOP – need some alterations. United's ESOP has been too focused on providing the notion of employee control of the carrier through majority-ownership. In reality, the employees do not really control the company – they get three voting board seats out of 12 – so employees have false expectations about what they “bought” ... and yet investors shy away from United stock because of the large influence that employees are perceived to have. Instead, the focus of employee ownership should be on the compensation and identification effects: that employees get rewarded when the company is profitable and tied to the company, but do not expect to govern the company directly. Thus, the employee share of ownership should be reduced below 50%, simply to change the symbolic message. Furthermore, in the spirit of establishing policies that apply across occupations to generate more of a sense of teamwork, the flight attendants, who did not participate in the ESOP, should be brought into an ownership position – or at least given a non-voting seat on the board (pilots and mechanics “paid for” their voting board seat, so you couldn't just give another one to the flight attendants for free).

In the end, achieving an quantum improvement in United's culture would then offer a path towards filling in United's network gap. If any carrier has a worse culture than United, it is US Airways. At US Airways, the suggestion of imitating Continental's SUV giveaway for perfect attendance prompted one manager to retort: “I'll be damned if I'm going to give a flight attendant a truck just for showing up to work!” With its new high-performance culture leading to lower costs and better customer service, United could simply steadily outcompete US Airways to take control of the East Coast markets.
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