United Airlines

United Airlines

P.O. Box 66100
Chicago, Illinois 60666
U.S.A.
(312) 952-4000

Wholly-owned subsidiary of Allegis, Inc.(formerly UAL, Inc.)
Incorporated: December 28, 1934
Employees: 43,800
Sales: $9.918 billion
Market Value: $2.966 billion
Stock Index: New York

United Airlines is one of the world’s largest airline companies. United is a product of several mergers of airline companies which were originally founded in the 1920’s. Through the years United experienced steady growth as a major domestic airline, pioneering the use of modern aircraft and equipment. After 34 years under the leadership of William “Pat” Patterson, United has recently suffered from inept management, inconsistent profits, and strong competition. Despite this, United has overcome many of its problems and achieved its long-time goal of expansion across the Pacific.

United Airlines was created in the early 1930’s by Bill Boeing’s aeronautic conglomerate in order to exploit demand for air transport and to serve as an immediate market for Boeing aircraft. At first United was similar to a consortium, involving the participation of several independent airline companies. One of those companies was Varney Air Lines, credited with being America’s first commercial air transport company. Varnay’s 460-mile network between Pasco, Washington and Elko, Nevada was linked with Boeing Air Transport, which operated an airmail service between Chicago and San Francisco. This route crossed Vernon Gorst’s Pacific Air Transport network, which ran mail between Seattle and Los Angeles. The National Air Transport Company, operated by New York financier Clement Keys, connected with Boeing in Chicago, flying mail south to Dallas. Stout Air Services, which had the financial backing of Henry and Edsel Ford, operated an air service between Chicago, Detroit and Cleveland with Ford tri-motor airplanes.

These airline companies cooperated with Boeing, who manufactured aircraft in Seattle, and Pratt & Whitney, an aircraft engine manufacturer in Connecticut operated by Frederick Rentschler. Together these companies formed a “vertical” aeronautic monopoly, restricting the delivery of new aircraft to its constituent partners and devoting its resources to eliminating competition on its air services. The airline group became known as United Air Lines in 1931.

Among other things, the group was responsible for the introduction of air-to-ground radio and stewardesses. The radio improved communication and safety. The stewardesses, all eight of whom were registered nurses, were actually hired to allay passengers’ fear of flying. A United executive at the time commented, “How is a man going to say he’s afraid to fly when a woman is working on the plane?”

In 1934 National, Varney, Pacific and Boeing officially merged under the name United Air Lines Transportation Company. Pat Patterson, a banker and Boeing official, was placed in charge of the airline at the age of 34. That year, however, congressional legislation outlawed the type of monopoly United had formed with Boeing and Pratt & Whitney. The airline was forced to divorce itself from the conglomerate and subsequently became an independent company based at Chicago’s Old Orchard (now O’Hare) airport.

In 1936, after several airplane accidents, a series of syndicated newspaper stories appeared which sensationalized the horror of airplane crashes. These stories incited a virtual state of panic which drove passengers back to railroads by the thousands. The airline industry was so deeply affected that many smaller companies were faced with bankruptcy. United responded by retaining a popular military test pilot named Major R.W. Schroeder, who was hired to oversee the company’s implementation of new safety codes. With this action United helped to rebuild the public’s confidence in air travel.

As one of the nation’s larger airline companies United maintained a position of leadership in the industry, constantly demanding newer, more advanced aircraft. United funded many of the developmental costs of Douglas’ DC-4, the first four-engine passenger plane. However, when the United States became involved in World War II, all DC-4s were devoted to the war effort before ever having carried a commercial passenger. The company’s name was shortened to United Air Lines in 1943 and new plans were made for the airline in anticipation of the war’s end. When the war ended two years later United redeployed its aircraft and resumed commercial flying.

In 1954 United became the first airline to employ flight simulators as part of its training and pilot testing programs. The following year United placed an order with Douglas aircraft for DC-8s, the airline’s first passenger jetliners. Although Boeing’s 707 jetliner actually became available a few months before the DC-8, United preferred the DC-8 because of its seating arrangement and other cost advantages.

In spite of United’s favorable position in the industry, its competitors were growing rapidly and in many cases outperforming United. In short, the company was in a brief period of decline. However, when United acquired Capital Airlines in 1961 its network in the eastern U.S. was strengthened, helping the company to regain its position as the nation’s number one airline.

United’s president Pat Patterson retired in 1966. The man elected to replace Patterson was George Keck, an engineer who rose to the top position from the company’s maintenance department. Keck was generally regarded as arrogant and secretive. It has been reported that his abrupt manner and authoritarian personality offended many people within the airline, as well as in the Civil Aeronautics Board and the company’s unions. As a result, this severely limited his effectiveness and ability to manage the airline in many ways. In 1971 Keck was forcibly removed in what was described as a “corporate coup” instigated by two members of the company’s board, Gardner Cowles and Thomas Gleed.

In 1967, during Keck’s first year, United became the first airline to surpass $1 billion in annual revenue. On December 30, 1968 United created a subsidiary called UAL to operate its non-airline businesses. On August 1 of the following year United Air Lines became a subsidiary of UAL. Western International Hotels was acquired by the UAL holding company in 1970. Western’s name was later changed to the Westin Hotel Company and linked to another UAL subsidiary which arranged travel packages. Westin’s operations later grew to represent about one-twelfth of UAL’s total business.

Eddie Carlson, who had a record of success while in charge of the Westin Hotel subsidiary, was named to succeed Keck as UAL’s new chief executive officer. Carlson had a warm and personable demeanor which motivated everyone working for UAL, in every division and at every level. He flew 186,000 miles one year, inspecting the facilities and terminating the employment of what he regarded as redundant company bureaucrats. Despite his lack of experience in the airline industry, Carlson was successful in reversing the company’s discouraging trends.

Carlson began to prepare a successor for his position in anticipation of his retirement. The man he chose to run the company was Richard Ferris, whom he had promoted from the Westin hotel subsidiary. When Carlson was named chairman of UAL and United, Ferris was made president of the airline. In 1978 Ferris was promoted to chairman of United and president of UAL. Carlson remained as chairman of UAL until his retirement in 1983.

Notwithstanding efforts to improve the relationship the company has with its unions (which deteriorated during the leadership of George Keck), United remains on cautious terms with its employee representatives. In 1976 the airline agreed to a million dollar pay-back settlement with women and minority employees in an anti-discrimination suit. In 1979 United lost $72 million, largely as the result of a month-long labor strike that year.

Under the leadership of Richard Ferris the airline reached a compromise with its pilots’ union. The agreement guaranteed that layoffs would not be authorized in return for more flexible work rules. The lower operating costs which resulted from the agreement were passed on to the consumer with the formation of a discount air service called “Friendship Express.” The service was also intended to allow the company to more effectively compete with cut-rate airlines such as People Express and New York Air.

In 1978 and 1979 UAL continued to diversify its operations when it acquired Mauna Kea Properties and the Olohana Corporation in Hawaii for $78 million. As resort developments, these acquisitions allowed UAL to take more advantage of the tourist business in the airline’s most popular destination.

In 1978 Congress passed the Airline Deregulation Act. Under the new legislation airline companies were free to enter new passenger markets without prior government approval. United was the first major airline to support deregulation. When the Act was passed, however, United was forced to scale down its operations in order to compete profitably. Richard Ferris later commented, “If we did make a mistake, it was in not recognizing the intensity of pricing competition that deregulation would bring, and getting structured to cope with it.” Executives with smaller airline companies expressed their fear that the larger airlines would concentrate their resources on contested markets with the goal of forcing the smaller companies out of business. One executive poignantly remarked, “What Ferris wants is to have us for lunch, and I don’t mean at McDonald’s.”

In 1985 United acquired Pan Am’s Asian traffic rights for $715.5 million. The agreement also included 18 jets, 2700 Pan Am employees, and all of Pan Am’s facilities in Asia. The addition of 65,000 route miles and 30 destinations to United’s network made other acquisitions pale in comparison. Ferris said, “We could spend two or three lifetimes and never get all the traffic [rights] we’re buying from Pan Am.”

The sale of these routes helped Pam Am out of a short-term financial crisis. United is better suited than Pan Am to operate the Pacific routes because of its well-established network in the western U.S. It may, however, be years before the acquisition pays for itself. The most unique feature about the transfer of these routes is that they were sold as an independent business entity, as if the routes were a subsidiary. The Pan Am routes agreement also provides insight into Richard Ferris’ long-term plans for United.

Ferris joined the board of directors at Procter & Gamble in 1979 with the intention of studying its successful marketing formulas and applying them at UAL. He restructured UAL in order to reduce costs and improve marketing. Since 1982 costs have been controlled, productivity has risen, and profits have stabilized. Part of the new marketing strategy involves the establishment of additional passenger transfer points, or “hubs.” In addition to its main facility at Chicago’s O’Hare airport, United operates secondary hubs in Denver, San Francisco, and Dulles airport near Washington, D.C.

In 1986 United’s purchase of the bankrupt Frontier Airlines unit from People Express was canceled when the United pilot’s union failed to reach an agreement with management over the manner in which Frontier pilots were to be absorbed by United. The $146 million acquisition promised to ease competition at Denver’s Stapleton airport, where United, Frontier and Continental were engaged in a costly battle for passengers. People Express closed Frontier in August of 1986 and declared it bankrupt. Less than a month later People Express was acquired by Frank Lorenzo’s Texas Air Corporation, and Frontier was liquidated. The following February People Express was absorbed into Continental Airlines. Still competing with United in Denver, Texas Air now controls airlines with 20% of the domestic airline market, compared to United’s 16% share.

United has started to replaced its fleet of B-727s with newer wide-body B-767s on more heavily traveled routes. After 25 years United is the last major airline company which still operates DC-8s. Federal regulations on noise pollution, however, have forced United to replace the engines on its DC-8s with quieter models. In addition to these aircraft, United flies large numbers of B-737s, B-747s, and DC-10s.

United lost its number one rank in passenger volume to American Airlines in 1985. In spite of this apparent setback, United’s immediate prospects are very good. Early in 1987 it was decided to change the name of UAL in order to distance it from the initials of its airline subsidiary. UAL was renamed “Allegis,” a curious computer-generated choice which combined portions of the words “allegiance” and “aegis.” With an airline, a hotel chain, the Hertz Rent-a-car company, and the Apollo computerized reservations system to coordinate them all, Allegis has become an integrated full-service travel company.

Shortly afterwards, Allegis encountered a number of problems with Ferris’ strategy to create a travel conglomerate. Several investor groups noted that Allegis’ subsidiaries would be worth more as separate companies than as divisions of Allegis. On May 26, Coniston Partners announced that it had acquired a 13% share of Allegis stock, and that it would be purchasing more in an attempt to gain control of the board and remove Richard Ferris. The Allegis board initiated an anti-takeover defense in which the Boeing Company was given a 16% stake ($700 million) in the company in return for a $2.1 billion aircraft order. The defense failed in June, forcing Ferris and several other board members to resign. The new board appointed Frank A. Olson chairman of Allegis, and later as president and chief executive office of United. The board also announced its intention to sell Westin, Hilton International, and Hertz, in addition to a portion of its Apollo reservations system. The board also expressed a desire to change Allegis’ name back to UAL.

Principal Subsidiaries of Allegis

United Airlines, Inc.; Westin Hotel Company; Mauna Kea Properties, Inc.; The Hertz Corp.

Further Reading

The U.S. Airline Industry: End of an Era by Paul Biederman, New York, Praeger, 1982.