42-Will a Partial Silver Strategy Work for United?

An industry leader falters in its Reliability reputation at its extreme peril. Consider Sears as a poster example. Here is the story of an industry leader that suffered from a disastrous Reliability performance several years ago. It did manage to halt its market share decline. But, by the time it did so, it had fallen well behind its competition. It’s story shows us how difficult it is to recover from just a couple of years of very bad performance.

Posted 8/16/08

Recently, United Airlines announced that it would reduce its service to some of the biggest cities it serves and shift assets to the service of smaller cities. Big cities like Nagoya, Japan and Chicago will lose some service, while cities like Grand Rapids, Michigan and Gillette, Wyoming will gain service.

We have seen this before. In the very early years after airline deregulation, Piedmont Airlines stepped back and watched the largest airlines in the country rush past them to serve the largest cities in the U.S.: New York, Chicago, Los Angeles, and so forth. Once the crowd had blown by, Piedmont initiated service to smaller cities, where there was less competition and higher prices. This strategy proved to be very successful for Piedmont. For several years, it enjoyed high profits and a sterling reputation.

So, can United pull off the same strategy? Unlikely. Really, the airline isn’t trying to use a Silver strategy exclusively. Piedmont was a small competitor in the marketplace. TWA, Eastern, American, United, Northwest and Delta were all larger. It had little likelihood of head-to-head success against these larger carriers. Instead, it chose to follow a pattern of competition that has proven successful time and again for smaller competitors. We call this a Silver strategy. (See “Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets” in StrategyStreet/Tools/Perspectives.) Part of this strategy is to focus service on segments of customers where there is less competition and where average unit prices are higher. These are always smaller market segments.

This strategy is not appropriate for United. As the number two carrier in the country, it cannot succeed in building a Silver strategy without destroying itself in the process.

On the other hand, United is not trying to follow a Silver strategy exclusively. It wants to take advantage of a market that Silver competitors would naturally serve. United is tweaking its strategy on the margin to serve smaller cities with less competition and higher prices per seat mile flown. This set of new markets will complement, rather than replace its big hub and spoke network.

These changes will help, but not save, United. United’s big problem is that it remains a high cost producer in the marketplace, even against some of its large competitors. Until United can stand toe to toe with low cost competitors on equivalent routes, it should continue to weaken in the marketplace. Whether it can do that eventually is as much in the hands of its unions as it is in the control of management. Not promising. See the history of the domestic steel industry.

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Update 2022:

Piedmont Airlines became part of USAirways in 1987. 2 years later US Airways renamed the company USAir Express until 1993 when its former name returned. In 2013, US Airways merged with American Airlines and ceased to be an independent company.

By early 2020, the US domestic airline industry had become an oligopoly. The top 4 airlines (Delta, American, Southwest and United) controlled nearly 2/3 of the total market and had good control on pricing.

A 2022 evaluation of the quality of customer service in airlines had the following ratings for each of the major airlines, with a possible score of 100: Delta 75.77, Southwest 67.0, American Airlines 52.59, and United Airlines 49.65.  These composite scores considered 4 measures of customer service: on time arrival, percentage of canceled flights, mishandled baggage and customer complaints.  Looking only at monthly customer complaints per 10,000 passengers revealed the following numbers for the 4 major airlines: United .42, American .21, Delta .11 and Southwest .06.

During the period 2010 to 2020, all 4 of the major airlines gained share. However, United gained the least and continues to lag as the number 4 competitor in the industry.

CHARACTERISTICS OF GOLD AND SILVER COMPANIES

Gold competitors are the largest, most successful companies in their industries, such as Federal Express, Owens/Corning Fiberglas, and Paccar. While most industries have only one Gold, a few (such as meatpacking with ConAgra and IBP, and trucking with Yellow Freight and Roadway) have two. Gold firms hold the highest or second highest market shares and often have a powerful brand-name franchise. They grow faster than their industries and have above-average returns on investment.

Silver competitors are smaller and face longer odds of survival than Golds. While they too, have above average sales growth and ROI, their names are less well-known, except within their industries, and they are third or lower in market share. Examples of Silver companies are Airborne Express, Tamko (residential roofing), and Freightliner (truck manufacturing).

Gold and Silver competitors are neither numerous nor certain to exist in every industry. A typical hostile market might have one Gold company, with a market share of 20%-40%, and one Silver, with a market share less than half that of the Gold. The rest of the market belongs to several companies of varying size that have slow growth, low returns, or both. Some industries lack a Gold or a Silver competitor, and some have neither. For example, the farm equipment industry during the 1980’s had a Gold company (John Deere), but no Silver company. The lodging industry had a Silver (Marriott), but no gold. The domestic integrated steel industry had neither a Gold nor a Silver. A Gold or a Silver will exist only where a management follows a very disciplined strategy in its market.

HERE is more about these competitors and their strategies.

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Update 11/25

By the end of 2025, United had made significant progress especially on and reducing costs. However, its market share had yet to move much. It faces a long slog to improve its fourth-place position among the large airlines. It faces a wall of a difficult Reliability reputation will to surmount.

Let’s revisit a bit of history. In 2010, United merged with Continental Airlines. The two companies’ combined had a market share of 24% and led the domestic airline industry. Unfortunately, the integration of the two airlines was a disaster. On-time performance, customer satisfaction, and virtually all measures of efficiency fell out of bed as the two companies struggled to unify customer service and operations. United’s market share fell 9 points in just two years will. It reached 15% then and has remained at that level, and forth place among the large four airlines, ever since.

Let’s take a brief trip through the Customer Buying Hierarchy to guess at how United lost so much share so quickly. In 2010, it led the industry on Function, where function is measured as the number of destinations and arrival times in the domestic market. It also led in Convenience due to its established locations in so many departure points. It suffered from the same Price problem that the other two legacy airlines, Delta and American, faced against the industry’s aggressive low-cost carriers. Undoubtedly, this Price problem contributed to its share loss, just as it did with the other legacy carriers. But United’s albatross was its dauntingly poor Reliability reputation. The poor performance of the integrating airline cascaded in a growing din of customer complaints and dissatisfaction. That poor Reliability reputation drags on its performance even today.

There is no question that United has made some significant strides, especially in the last few years. It leads the industry in international routes, with their premium pricing. It has built on its premium seat availability by expanding its premium seat mix. It has used its economies of scale and digital investments to improve customer experience and reduce costly delays. It has emphasized an improving customer service in its training programs. The result has been a much-improved return on investment profile but not much change in market share. United is now nearly comparable with Delta in cost structure and better than both American and Southwest. Still, its market share remains stuck at 15%.

Why is United’s market share not responding faster to its renewed emphasis on customer experience? There are two reasons. First, industry Volatility (the movement of market share from one’s competitor to another competitor) is relatively low today. Second, as profits have improved for the three legacy airlines, United’s competitors are also investing in improving Reliability through better customer experiences. Industry Volatility has fallen as the industry leaders have taken away the low-cost carriers’ superior cost and price position. Price differences drove significant changes in market share until the recent couple of years. Those days are gone. United, Delta and American have largely turned Price into a commodity, where everyone’s price is about the same. But the industry’s pricing today is attractive for the industry and the industry leaders are all investing in improving their Reliability performances. That leaves less room for United to make any meaningful Reliability differentiation between itself and the industry’s usual leader, Delta. United does not have any choice in making customer experience Reliability improvements because it cannot afford to fall behind its competition. But its current efforts to improve its Reliability relationship with customers will gain it market share slowly because Volatility is low. United, with its limited product differentiation, is unlikely to win much against its competition. Instead, it must hope for and exploit any failure on their part in order to benefit from Volatility.

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