TURBULENCE

How China Could Kill United Airlines

Defending what looks like a racist attack is a sure-fire way for the airline to lose 20 percent of its marketshare, made up of U.S.-bound tourists.

Louis Nastro / Reuters

The barbaric removal by force of a passenger from a United Airlines flight is now likely to have a serious impact on the airline’s business in China. Video of the incident went viral in China — viewed more than 200 million times — where people assumed that because the victim of the incident was of Asian descent it was an example of racial bias by the police involved.

There is no proof of that, but the impression was enough to light a blaze of outrage—just as United CEO Oscar Munoz doubled down by telling his staff that the situation “was unfortunately compounded” when the passenger refused to leave his seat.

“Our employees followed established procedures for dealing with situations like this,” Munoz added. “While I deeply regret this situation arose, I also emphatically stand behind all of you, and I want to commend you for continuing to go above and beyond to ensure we fly right.”

Nearly $1 billion was wiped off of United's stock value on Tuesday.

United has a lot at stake in China, it is by far the largest U.S. carrier operating there, with 20 percent of the routes between China and the U.S. including non-stop flights to Beijing from Newark, Chicago, Washington, and San Francisco. United’s U.S. rivals, Delta and American, have about 8 percent each. United has moved beyond the main Chinese hubs to secondary cities like Chengdu and Xian.

Most of the growth in traffic between China and the U.S. is from Chinese cities. China is the fifth biggest market for tourism in the U.S. and that is expected to more than double in the next five years. American Airlines recently bought a small stake in a Chinese airline, China Southern, the largest airline in Asia (owned by the Chinese government) which allows the two airlines to share bookings and gives American a new conduit to cities that it does not itself serve, while at the same time giving the Chinese new flights into Los Angeles, San Francisco and New York.

Given this new level of competition for United in China, in the realm of unintended consequences, Munoz’s statement is likely to turn out to be very costly. There is already an online chorus of people in China demanding that the Chinese should boycott United.

Munoz had already made a maladroit statement that resorted to the euphemism “having to re-accommodate these customers” when describing what happened, and said his airline was “reaching out” to the specific victim to “further address and resolve this situation.”

United’s problem goes back to the creation of an airline monster that nobody seems able to manage—the merger of United and Continental in 2010. This was one of the steps leading to the creation of what has become an oligopoly of the three largest domestic carriers. In the case of United, it turned out to be a deeply troubled transition, with mismatched company cultures, overlapping routes that were difficult to reconcile and deteriorating staff morale that met passengers at every gate.

As a result, United’s financial performance has lagged behind competitors Delta and American, particularly in its domestic operations. And that, in turn, has put manager under pressure to put profit before passengers.

The airline’s head of finance, Gerry Laderman, told an industry conference in Dublin last month, “We need to get back in the game domestically.”

They are well short of that. The overbooking episode in Chicago is worse even than it might appear, showing how far United has to go.

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Overall last year American carriers were doing well in efficiently managing their capacity to avoid the curse of overbooking. The way airlines measure bumped passengers is reduced, ridiculously, to decimal points and so the statistic looks strangely detached from actual people, but only 0.62 of every 10,000 passengers were bumped from flights they had booked in 2016, the lowest rate since 1995.

Overbooking is legal but it leaves such damage to customer relations, not to mention passengers’ travel plans, that no airline wants it to happen. It always results from a calculated gamble—that a small number of booked passengers will be no-shows. Mostly, that works out but in this case United seems to have exacerbated the problem by insisting that its flight crew in transit got priority over passengers.

The Chicago debacle has exposed that the airline is still not up to the simple challenge of respecting its passengers and, at the same time, rebuilding its business.

As for Scott Kirby, the new president of United, who left American Airlines last year to take on the job, he seems to be in the process of discovering that he inherited the worst nightmare of an airline in an industry that has a long way to go before passengers will get the standards of service that they have every right to expect.