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United Airlines’ Big Aircraft Order Has Upsides And Risks

Date: July 1, 2021

By Ben Baldanza, Forbes

United Airlines has placed the biggest aircraft order in its history, and one of the biggest ever in the U.S. airline market, signaling a very bullish view for a travel demand return. The order, for all narrow-body aircraft, will include planes for both growth and replacement. The airline has been actively marketing the benefits of this order since its announcement, with CEO Scott Kirby touting that the main idea behind the order is for an improved customer experience. This move is the most aggressive United has made, and follows an order just a few weeks ago for 15 supersonic jets from a new company called Boom.

There are a lot of upsides to this new order for United, including a relatively quick refresh of a fleet that has gotten quite old. The two new plane models, the Boeing 737MAX and the Airbus A321NEO, are both highly efficient, fuel-saving airplanes that will be better for the environment than United’s current fleet. But this order has some significant risks, also, and has implications for domestic U.S. capacity, affects on competition, airline labor markets, and the regional airline industry.

Replacement Of Regional Jets

According to United’s press release, many of these planes will replace 50-seat regional jets (RJs). This has plenty of interesting implications. These replacements will mean a step function increase in size per departure compared with the RJs, meaning that the schedule may need to change in terms of frequency or otherwise a lot more people will be needed for each flight. The RJs are flown by regional airlines on a cost-plus basis for United, making these flights a much lower per-trip cost than a United-flown flight. This is partly because the regional airlines use labor not covered by United’s unions and these work at generally lower wage rates. When a 737 replaces an RJ, it is now United pilots flying the plane and the regional carrier must redeploy their plane with United or find something else to do with it. The larger plane will burn more absolute fuel although likely less fuel per seat, and since it is heavier it will cost more to land it at most airports and it will be more expensive to insure.

Other Fleet Moves Expected

Not long ago, CEO Scott Kirby spoke positively about United keeping more wide-body planes than his primary competitors, and he saw this as a strength for when long-haul business travel returns. Not sure if he still believes this, as both the 737MAX-10 and the A321NEOs just ordered can replace the carriers’ Boeing 767 fleet if not more. Using a long-range narrow-body instead of a wide-body aircraft reduces the financial risk of a flight significantly and allows more destinations to to be added from hubs like Newark and Houston. This order suggests that United will soon be announcing a retirement schedule for some of their older wide-bodies.

Also, though, many of these new planes will likely replace older narrow-bodies too, like their Airbus A319s or older Boeing 737 models. This order gives United the ability to simplify their fleet while making it more efficient, and that means deciding soon which aircraft will leave the fleet as a result of of this new capacity.

Continued Build-Up Of Hubs

In the last few years, United has been steadily building up its hubs in a strategy that is working well for them. For example, from their hub in Denver, they fly to Los Angeles — but so do lower-cost carriers Southwest and Frontier. United is forced to match the low prices set by these more efficient carriers on this route. By adding service from Denver to more mid-size and small cities, like Kalispell, MT, for example, they can be less dependent on the low-price local traffic from Denver to L.A. and carry a connection from Kalispell to L.A. instead. Using this idea, United has been building its hubs not only in Denver but in Houston, San Francisco, Chicago and Newark as well.

This new fleet order will support this strategy but also make the feed more expensive, with a new United airplane instead of a much lower-price regionally flown RJ. This means that United may have to change the “bank” structure of their hubs (the number of times per day planes arrive so passengers can connect) as they will fly their frequencies with the larger-gauge airplanes. Alternatively, they can add even more cities but these would need to support the larger cabin size of the new equipment. This large increase in size of the average departures will affect their schedule in ways that will be interesting to watch.

Impact On Unit Costs

In some ways, this order helps to lower United’s unit cost of production by bringing in more efficient aircraft that will burn less fuel and, for a time at least, need less maintenance. However, they are also putting pressure on their own labor rates as they will need many more pilots, flight attendants, and mechanics paid at United’s rates to support the new aircraft, and this is a big increase in cost compared to the regional feed that will be replaced.

The cost of labor is becoming a major issue for the economy in general, and so committing to high-cost capital that will put even more pressure on wages is a risk for United’s cost structure. At the same time as they are adding a lot of seats per departure, they are also greatly increasing the costs of their hub feed and this will ensure that they remain highly dependent on business travel that may or may not fully return. This upgrade also puts pressure on an already strained balance sheet, adding billions in debt while most airlines are focused on balance sheet repair after leveraging up to stay alive through the pandemic.

Curious Response To Competitive Dynamics

This increase in seating capacity per flight, focus on hub connectivity, and unit cost pressure are coming in a competitive environment where low-cost carriers are expanding more rapidly and adding non-stop routes that overfly the big carriers’ hubs. United seems to be focused on beating American and Delta at the big airline game, but in doing so it is making it harder for them to compete with the fastest-growing segment of the industry.

They may argue that the marginal cost on the incremental seats gives them the tool they need to be price competitive where necessary. This may be true in some cases, but when a carrier can’t set their price because of competitive capacity, this puts them in a precarious position for at least part of their network. United does not dominate their hubs in same ways as Delta and American do, and this means that they have more competition for customers at all points on the price spectrum. They seem to be making a bet that customers will choose United, even at a higher price, if their service is good enough. Other airlines that have made this bet haven’t always been successful.

The Customer Experience

The most interesting thing about United’s announcement is how they have positioned the new order. Rather than say it make them more green (which it will), or burn less fuel (which it will), or be more reliable (which it will), or even be more profitable (uncertain), CEO Kirby has highlighted that this fleet upgrade will make for a better customer experience, even focusing on the individual screens at each seat being great for families. That is a big bet to make, as most customers bring their own screen onboard anyway and when the seat-back screen breaks, the whole flight is ruined for some customers. What United seems to miss is that pleasant employees and proactive responses to unforeseen circumstances are the most customer-friendly things any airline can do. A flight that is late, with rude or indifferent service by the airport and in-flight staff, is not made into a good experience with with new aircraft and a seat-back screen. Delta has the oldest fleet among the big three U.S. carriers. but scores high on customer service because they do the soft things so well.

How To Think Of This Order

This new order by United is big news for the company and for the U.S. airlines. It steps up competition among the big carriers, and makes a very bullish statement about the return of business travel to support this incremental capacity. Choosing for-certain costs against prospective revenues is a big risk. United is buying great equipment that likely is being acquired at very attractive prices, so this lowers that risk somewhat and their hubs are in big cities that probably can support all these new seats. But pressure on costs, especially labor costs, and becoming less reliant on lower-cost regional feed puts them in a position where traffic must not only return, but choose them over their competition. While Delta and American will take notice, likely the lower-cost airlines in the U.S. will be even more emboldened to grow knowing that these moves put pressure on United in ways that make a really low fare the perfect antidote.

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