41-Will a Partial Silver Strategy Work for United?

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.

Posted 8/16/08

Update:

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.

Golds and Silvers differ in how they implement the five basic themes, but each is like its counterpart in other industries. Golds win like other Golds, Silvers like other Silvers. Exhibit 1 compares some of the important characteristics of Gold and Silver competitors.

HERE is more about these competitors and their strategies.

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THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.