UA's Tague Continues Distribution Cost Discussion

Though they weren't the sort of comments that would raise hackles around the industry--the way American Airlines' Gerard Arpey's and Delta Air Lines' Richard Anderson's did--United Airlines COO John Tague discussed distribution costs today with analysts. "Ultimately, we've got to have capacity low enough to be able to have some commercial courage in attacking distribution costs," he said. "If we are constantly terrorized by excess capacity, the chances of improving the economics around these key cost components in the business are not very high."
So what has United been doing to lower distribution costs? Putting forth "a line by line cost of sales commitment at the highest level of detail," Tague said. "Clearly, this is a very large expense item for the industry; what we pay for distributing a product that right now doesn’t make any money."

Specifically, United has been cutting travel agency commissions, "particularly internationally," Tague said, and making "what I would characterize as good initial progress in terms of online travel agencies. When you look at OTAs, they tend to offer less value to our most profitable customers. The large travel management companies are performing a service that we really can’t step in and perform, and one that our most profitable corporate customers have determined are of significant value to them."

Overall, Tague reported "substantial" progress in cutting distribution costs, "as evidenced by a 36 percent [first-quarter] decline year over year in United's distribution costs on a 21 percent reduction in consolidated passenger revenue. While the progress is significant, more must be done."