United Airlines is pursuing higher-paying passengers by adding larger aircraft
The order isn’t just about the planes, which will bring United’s orderbook for narrow-body airliners to around 500, 300 of which will be used to replace older, less-efficient planes.
The order is the foundation of a multibillion-dollar rebranding effort by United to reclaim high-paying business travelers who have been largely grounded since the pandemic began. The airline also wants to steal some from competitors such as American, JetBlue, and, most likely, Delta, which had prioritized higher-paying customers prior to the pandemic.
United’s stock has risen more than 21% this year, roughly in line with the NYSE Arca Airline index, which tracks 16 airlines in North America, South America, and Europe, as well as the European budget airline Ryanair. However, the sector is currently facing headwinds as the Covid delta variant raises doubts about the viability of lucrative international travel in the near future.
Despite recent developments, running an airline frequently entails playing the long game, with aircraft ordered years before they are delivered.
Here are five key takeaways from United’s big announcement:
Seating that is more ‘premium’
According to United executives, the new planes will have more first-class and extra-legroom seats than the current fleet, which cost more than standard coach.
United claims that by 2026, it will have averaged 53 of these “premium” seats per departure in North America, a 75 percent increase over 2019.
That higher-paying passenger is critical for United as it seeks to recoup revenue after losing $7 billion last year, though analysts predict that losses will narrow this year. On Tuesday, Chief Commercial Officer Andrew Nocella told analysts that the standard coach cabin accounted for only 30% of United’s revenue in 2019.
Refreshing the cabin
The new Max planes will include new features such as large overhead bins, in-seat power, and seat-back entertainment systems with Bluetooth audio. It’s a departure for United, which previously avoided seat-back entertainment on some of its newer planes. According to the airline, these will be retrofitted with the new systems.
American Airlines, CEO Scott Kirby’s former employer, has removed screens from many narrow-body planes, arguing that passengers will use personal devices to watch movies and other entertainment, whereas screens have been a mainstay on most Delta mainline planes.
Some of United’s new planes will replace about 200 single-class regional jets, which, according to Kirby, “our customers dislike.” As a result, the airline would be less reliant on the regional airlines with whom it contracts to operate those planes. United will also phase out its Boeing 757-200 aircraft. United anticipates adding 25,000 jobs by 2026, including pilots, flight attendants, and mechanics.
United, according to the airline, needed a facelift. According to Jefferies, it has the oldest fleet of any US airline, at around 16 years old. Cabins on planes flying in North America vary in terms of amenities and configurations.
“We’re going to fix that once and for all,” Nocella said at a splashy debut for the airline’s first Boeing 737 Max 8 and the new cabin, held at the carrier’s hangar at Newark Liberty International Airport.
Expanding with larger planes
United can expand more easily at congested hubs by using larger jets. The airline expects the largest planes in the order, the Max 10 and the A321neo, to help it expand in airports like Newark and San Francisco International, which were important business travel hubs prior to the pandemic.
United claims that its reliance on single-class regional jets has limited its ability to improve performance. According to an investor presentation, it has an average of 104 seats per aircraft, compared to 114 for other large network carriers and 175 for ultra-low-cost airlines such as Frontier or Spirit.
United says it will increase capacity by 4% to 6% per year through 2026, primarily by using larger aircraft and adding more seats at hubs such as Newark, San Francisco, Denver, Chicago, and Los Angeles.
Spending in order to save
United claims that the fleet renewal will help it save money in the long run.
Regional jets are considered “high unit cost aircraft to fly.” They frequently spill demand. And, by the way, because this product has fewer seats, we frequently close our inventories very early,” Nocella told investors.
United claims that the order and its new strategy will help it cut non-fuel unit costs by 8% by 2026 compared to 2019.
Wall Street analysts expected the order, but some were concerned about the costs, especially since the airline is still recovering from the pandemic. United expects its adjusted capital expenditures to rise from $4.2 billion this year to $8.5 billion in 2023, with the majority of that going toward aircraft costs, before gradually declining. Jamie Baker, an airline analyst at JP Morgan, described it as “sobering.”
“The CAPEX cycle United is about to embark on should not be underestimated,” MKM Partners analyst Conor Cunningham wrote. “It is unclear how the company intends to fund these deliveries, but we believe that using cash as the primary form of payment is prudent.”
On the sidelines of the event, CFO Gerry Laderman told reporters that it would most likely be a “combination of financing and cash.”
He predicted that United’s net debt — $22 billion at the end of March — would remain relatively flat through 2023, but that financial ratios could be better than pre-pandemic levels by 2026 as the plan is implemented and older aircraft are replaced with more fuel-efficient ones.
Business travel demand is expected to increase.
The order would be worth more than $30 billion at list prices, but airlines typically get steep discounts, especially for a sale of this size. According to Rob Morris, head of consultancy at aviation data firm Cirium, the order is worth around $15 billion.
It’s still a significant cost, and it’s easy to see why CEO Kirby was so upbeat about the return of business travel.
While that segment is down 60% compared to 2019, it is still up from a 90% drop two years ago in 2021.
Kirby predicted that business travel demand, as well as long-haul international travel, another pillar of United’s business, would eventually return to 100%.
Kirby told reporters that the aircraft order and new cabins “levitate us to the forefront of the aviation industry.”
“We have the upper hand. We just have to play it correctly,” he explained.
Bank of America downgrades Virgin Galactic
“We continue to believe that Virgin Galactic will benefit from the new commercial space race. However, we believe that this premium has already been priced into the stock and will diminish as more commercial space companies go public,” said Ronald Epstein of BofA in a note.
Virgin Galactic’s rating was downgraded to underperform from buy by BofA. The firm maintained its $41 price target on Virgin Galactic stock, implying a 12.8 percent drop from Tuesday’s closing price of $47.02.
Following the Bank of America call, Virgin Galactic shares fell more than 3% shortly after trading opened on Wednesday.
Epstein’s call comes less than a week after the Federal Aviation Administration granted Virgin Galactic the license required to fly passengers on future spaceflights, sending the company’s stock up 39% on Friday.
“Space technology development carries significant risk, and the market tends to respond more volatilely to development-related news,” Epstein said.
Virgin Galactic shares are down 15.9 percent this week following Friday’s surge, but the stock price has nearly doubled in 2021.