How the West Might Be Won

By JAMES F. PELTZ

July 13, 1997 12 AM PT

TIMES STAFF WRITER

Most major U.S. airports are now dominated by one airline that’s seized the site as a hub for feeding the rest of its routes. Examples include Delta Air Lines’ overwhelming presence in Atlanta, where it handles 75% of passengers, and Northwest Airlines in Minneapolis.

Los Angeles remains one of the few exceptions, with no carrier having been able to carve out a commanding share. United Airlines leads at Los Angeles International Airport, but only with a modest 23% of the passengers boarded there, LAX figures show, leaving the airport among the nation’s most competitive.

Now United is out to change that.

Though they avoid the word “dominant,” United Chairman Gerald Greenwald and other executives of the world’s biggest airline are publicly declaring that they want United to be far and away the biggest carrier serving LAX, and that the goal is crucial to substantially increasing its sales and profit.

Using its 3-year-old Shuttle by United service as the chief lever, United plans to board an ever-increasing number of travelers at LAX for its more lucrative flights to the East Coast and Europe, and west to Tokyo, Hong Kong and Australia.

As that happens, United hopes to add more flights to those places from LAX--and perhaps expand its network to include some new destinations--although it’s not disclosing those plans just yet.

It’s not that United simply expects the West Coast Shuttle, which now has more than 400 daily departures, to directly feed more people through LAX on their way to some other city. Rather, United is betting that the heavy passenger traffic on its Shuttle routes will become an ever-growing “captured” audience--that is, travelers who have earned so many frequent-flier miles on the Shuttle that they then will use United to fly to other lands from LAX.

United also hopes that as it widens its lead at LAX, managers of corporate travel accounts and high-volume travel agencies will take notice and steer more LAX-based business to United, further boosting its bottom line.

But United’s proposal is audacious and risky, not only because it’s never been accomplished before at LAX, but because United’s public declarations could end up a humiliating embarrassment if its competitors counter with a steely defense and the plan flops.

And that’s just what United’s rivals have in mind.

“We’re not afraid of what they have planned,” sniffed spokesman Chris Chiames of American Airlines, which vies with United as the leading carrier of passengers from Los Angeles to New York and Chicago. “They’re viewing the world through a very static pair of glasses [and] hoping the world won’t change. But we’ve got our own set of plans.”

United’s effort also has plenty of skeptics outside the airlines.

“I don’t share their optimism,” said Michael Lowry, who publishes the trade newsletter AirWatch Report from Lake Oswego, Ore. “You have fierce competitors” at LAX, “and that competition is not going away.”

But if United’s plan does work, the payoff could be huge. United already dominates the San Francisco and Denver airports, and a preeminent position at LAX would mean it had an enormous advantage at the three busiest airports west of the Mississippi.

“The biggest story in the whole airline industry is United seizing the West Coast,” pronounced Brian Harris, airline analyst at investment firm Lehman Bros. in New York and a proponent of United’s game plan. “If they continue to grow and become the dominant carrier in L.A., that has big implications for the industry.”

For example, “the most lucrative revenue to be found in the airline business is transcontinental,” namely, flying from LAX to New York, “and if you dominate one-half of that equation, you’re in a tremendous position,” Harris said.

United, based in suburban Chicago, doesn’t expect to garner 70% of LAX’s business or even 50%. The airport’s inherent nature limits any airline in trying to amass such a huge share.

LAX is primarily an “origin and destination” airport--meaning people mostly arrive or leave from there, rather than passing through on their way to somewhere else, as they do in, say, Dallas and Denver.

Still, United wants its LAX share to climb well above 30%--compared with the 11% or less that Delta, American and each of the others now have--so that it clearly stands out as the airport’s No. 1 carrier.

And United--whose holding company, UAL Corp., is also the nation’s biggest employee-owned enterprise--contends that it can counter any defense its rivals will offer in Los Angeles.

“Our competitors are going to fight like hell,” acknowledged Rona Dutta, United’s senior vice president for planning. “But we think it’s too late for them to fight back.”

Too late? American, Delta and the others “don’t have the destinations [out of LAX] that we have; they don’t have the route network,” Dutta maintained.

Such bravado is a hallmark of the swaggering airline business, becoming especially noticeable when the industry is enjoying flush times, as it is now. UAL has seen robust earnings in the last two years, and its stock price has soared 241% since Shuttle by United was launched in October 1994. That far outpaces the 161% gain over the same period recorded by the American Stock Exchange index of airline stocks.

Yet United’s brash words have some industry analysts shaking their heads.

“Airlines have an uncanny ability to look at themselves in a vacuum,” as though the competition will stand still, said Jon Kutler, president of Quarterdeck Investment Partners, a Los Angeles investment banking firm that focuses on aviation and aerospace.

Said James Higgins, analyst at Donaldson, Lufkin & Jenrette Securities in New York: “United has, undeniably, Pacific destinations out of L.A. that American and Delta cannot match. However, I believe that it is highly unlikely . . . that either Delta or American will allow United to dominate Los Angeles.”

AirWatch’s Lowry even floated the idea that, if nothing else, United is being public about its plans to arouse the notice of passengers, travel agents and corporate travel executives.

“It may be nothing more than United exuding a sense of confidence” that could translate into more business, he said.

Nor does everyone agree with the notion that United could grab more big-profit corporate travel accounts merely by taking a bigger lead at LAX.

“In some cases it may work against them,” said Valerie Estep, president of Topaz Enterprises Inc., a travel-management consulting firm in Portland, Ore. “Some consultants advise corporate accounts to go to an airport’s secondary carrier, which might be more willing to negotiate [lower prices] in particular markets than the dominant carrier.”

But others say United’s plan could work.

“I think United has a shot at this,” said Michael Roach, president of the aviation research firm Roberts, Roach & Associates in Hayward, Calif.

The intra-California market, he noted, “is by far the largest air transportation market in the world, with 13 million passengers a year, and United’s Shuttle has driven all carriers essentially out of that market except for Southwest [Airlines].” The Shuttle, therefore, is “a powerful tool” to building loyal traffic on United’s LAX long-haul flights going east and west, Roach said.

Ironically, United’s assault stems from a stinging defeat its Shuttle suffered two years ago.

The airline launched Shuttle by United after its employees exchanged wage concessions for 55% ownership of UAL. The Shuttle promptly tried to mimic the sprawling route network and cheap prices of low-cost, low-fare king Southwest.

But United quickly found it couldn’t match Southwest’s service nearly route for route without losing millions of dollars, so it scaled back the Shuttle’s system to 20 cities and focused it on San Francisco and Los Angeles.

United then embraced the idea that if it could build a loyal ridership on the Shuttle--particularly between those two big cities--it could persuade more passengers to travel on the more profitable United flights going east and west from them. Also, the Shuttle would then be a critical cog in United’s total system even if the Shuttle service simply broke even.

Lehman’s Harris said the strategy is working. The Shuttle is an indirect weapon in United’s attack on LAX: It’s building brand loyalty among travelers--namely business travelers--to fly United whenever they leave Los Angeles.

About 80% of Shuttle passengers are members of United’s frequent-flier club, compared with an industry average of less than 50% for a typical airline flight. And with those miles building with each Shuttle flight they take, Shuttle by United fliers now have a strong incentive to fly United everywhere else.

“Not only does the Shuttle again make United stronger up and down the West Coast, it’s changing business travel patterns and convincing more business travelers to try United on the more lucrative routes,” Harris said.

The Shuttle also has shown that it doesn’t have to carry as many people as Southwest in order to maintain a strong position in California, said Jeffrey Long, analyst at J.P. Morgan Securities in New York.

In the year ended June 30, 1996, Southwest flew 4.6 million people between Los Angeles and San Francisco, reaping $234 million in revenue. United took in the same revenue on that route but flew 1 million fewer people, Long’s research shows. That’s because United is charging higher average fares than Southwest, fares United’s passengers will pay in exchange for frequent-flier miles they can use on the airline’s far-flung route network.

Besides the Shuttle strategy, United has taken or plans several other steps to enhance is position at LAX, including:

* Setting aside $150 million to expand and upgrade its two terminals.

* Opening an underground facility at the airport for incoming international travelers so they don’t have to be shuttled over to the Tom Bradley International Terminal to clear customs.

* Adding the newest Boeing wide-body jetliner, the 777, to its LAX-to-London route.

* Planning to overhaul its entire LAX schedule this summer to make space for additional flights to key destinations that carry high profit margins.

Those steps notwithstanding, United’s competitors don’t see why United should now be able to take an increasing lead at LAX. Even if it tries to add a destination or a flight or two to the cities it already serves, rivals say, they’re likely to do the same in order to negate United’s advantage.

“United has been one of the major carriers in the West for a long time,” said American’s Chiames. “If they haven’t been able to leverage their presence in California up until now, we question their ability to do so in the future.”

United’s rejoinder: Its plan will work now in good part because passenger traffic between Asia and Los Angeles (and San Francisco) is soaring, and “we think the Pacific is a major point of advantage for us,” Dutta said.

“That’s making L.A. seem more promising than it would have been 10 years ago,” he added.

Indeed, United currently has a big advantage there. Under a 1952 agreement between the U.S. and Japanese governments, the only U.S. airlines that can fly to Japan, pick up passengers there and then fly to other cities in Asia are United and Northwest.

But U.S. negotiators are now working hard to create an “open skies” pact between the nations that would let American, Delta and the others have that same access. And many analysts expect it will happen.

If it does, American and Delta will undoubtedly boost the number of LAX flights leaving for Asia, diluting the effect of United’s own expansion plans at the airport.

“United’s competitors are going to start catching up in that [Asian] market, at least as it pertains to LAX,” Lowry said.

For now, though, United is undeterred, especially because Los Angeles remains there for the taking--if any airline can find the right formula.

“Clearly it doesn’t make a lot of sense to go after an airport where there’s an airline that’s already strongly entrenched,” said United’s Dutta. “But at Los Angeles, no one can say, ‘I own this city.’ ”

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How They Stack Up

United Airlines has been increasing its market share at Los Angeles International Airport and is now trying to become even more dominant. Here are the major airlines’ shares at LAX, based on their percentage of the airport’s boarded passengers.

1992

United: 16.9%

Delta: 15.2%

American: 12.2%

Southwest: 6.5%

Northwest: 6%

US Airways: 6%

Others: 37.2%

1996

United: 23.0%

Delta: 11.4%

American: 9.3%