Why United Continental’s high-cost structure affects its margins

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High fuel and labor costs are growing concerns for all airlines

In 2013, almost 57% of United’s (UAL) $37,030 million total operating costs comprised fuel costs (33%) and salaries (23%), compared to Delta’s 46%. United also has a higher cost per available seat mile (or CASM) of 15.09 cents compared to 14.77 cents for Delta (DAL) and American’s (AAG) 13.67 cents. Low-cost carrier JetBlue’s (JBLU) CASM is lower, at 11.71 cents, and Southwest’s (LUV) CASM is 12.6 cents.

9.1. CASM

Unionized labor restricts flexibility

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After fuel cost, the other major expense for an airline is labor cost. The high percentage of employees belonging to labor unions adds to the cost, as the bargaining power of employees increase. Out of United’s 87,000 employees, 80% belong to labor unions. Salaries increased 8.6% in 2013 due to higher pay rates from new collective bargaining agreements, profit sharing, and other incentives.

Margins take a hit

The high-cost structure of the company has led to lower margins. United has the lowest operating margin, at 4.3%, compared to Delta Air Lines’ (DAL) 10.86% and other low-cost carriers such as Southwest Airlines’ (LUV) 8.52% and JetBlue’s (JBLU) 7.47%. The airline industry’s costs keep fluctuating with changes in fuel prices and wage rate negotiations. So, to remain in competition, companies use innovative strategies to increase passenger kilometers, reduce costs, and maintain profitability. In order to stay competitive, United plans to implement a $2 billion annual cost savings program.

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