Leaked: Gloomy forecast from United CEO Scott Kirby – low-cost airline on the brink of the abyss, Spirit Airlines doomed?
Scott Kirby, CEO of United Airlines, explained the competitive landscape of the airline industry to his employees. Live and let us fly reviewed the video. United is doing well, Kirby is overly optimistic. He offers important insights, but the path is far more difficult for the airline than he lets on.
Kirby presented Delta, United and Alaska as equally profitable – he adjusts the numbers to get there – American as breaking even and all the others as losses, even without a recession. Aviation regulator Subscribe shares this slide from Kirby’s presentation:
UA: pic.twitter.com/hGmoQzwmHb
— JonNYC (@xJonNYC) 14 August 2024
And he says Spirit Airlines could go out of business:
(T)he low-cost airlines are just a disaster. These are numbers that are going to kill a number of these airlines. Take Spirit Airlines, for example, at -30%. That’s a number that’s hard to put into context. But if you think about it at United, if we had a margin of -30%, that would mean we’re actually losing $4.5 billion in a single quarter.
The low-cost airlines had to contend with several headwinds:
- They have become less cost-effective. They pay the same amount for fuel as everyone else. However, labor costs have increased.
- Consumer preferences are moving towards premium. They didn’t have the products that people wanted to buy. Even where they were able to sell their seats, they were available at a discount while other airlines earned a premium. We don’t yet know if that will continue. There was an intertemporal substitution as a result of the pandemic and strong consumer balance sheets. We will have to wait for time and the recession to show if the shift is structural.
- People wanted to travel abroad. Low-cost airlines offer international flights to Mexico, the Caribbean and neighboring Latin America.
United and Delta are the most internationally focused and also the major airlines that have been profitable. American relies on partners for much of its international flights and retired its Airbus A330s, Boeing 767s and Boeing 757s during the pandemic – they lacked the planes for long-haul flights (apart from Boeing’s delivery delays) and their strategy was to avoid wide-body aircraft anyway.
Kirby admits that margins have fallen even at United and Delta – and that’s without a recession. Everyone complains about “too much capacity,” which in other words means that the number of seats in the market has led to discounts. while costs are also rising. Pilots make more. Mechanics make more. Flight attendants make more (and United will soon do the same). This underperformance exists even before any recession.
He says the recession doesn’t matter… except for workers’ jobs. And here I am skeptical.
First, we set a goal that United Airlines would never again have system-wide furloughs. And we got there – I’ve talked about this before – by having more cash on the balance sheet, leading the industry in profit margins, and continuing to pay down our debt. We’ve continued to do those things.
Is he really saying that just because United has money, they’re going to spend it on paying employees instead of downsizing their workforce? After American, United had the second-largest number of furloughs in the world during the pandemic. United had prepared for a collapse in air travel at the start of the pandemic before any other airline.
In general, United is certainly at recession risk. Their huge aircraft orders, while they could defer some costs, come with significant capital costs. Historically, Southwest and then Delta have had the strongest balance sheets. United is not in the same financial position as Delta. While they are stronger than they were in 2020, they have laid out a plan for significant growth – and international presence.
I do not believe his claim that United will stick to its growth plan in the event of an economic downturn and the associated reduction in air traffic.
(W)hen we are now in a potentially difficult economic environment, we are able to stick to our plan, continue to focus on United Next, continue to grow, continue to hire people, really stay the course, while the rest of our competitors in this case are the ones that have to start to shrink.
Almost across the board, airlines on the previous graph are beginning to shrink. Almost across the board, they have stopped hiring new employees or many of them have already begun furloughing employees.
What makes United different?
- MileagePlus is increasingly not. They have been devaluing their miles steadily over the last four years. There are too many elites compared to the benefits they can offer.
- It’s not the in-flight product. They’re bringing it up to par. The business class seat is good enough, but not a differentiator. The bedding is very good, but the rest of the upholstery product is not. Their domestic product is being upgraded with seatback screens and better Wi-Fi to become competitive with Delta and JetBlue.
- It’s not the service. Alaska, Southwest and Delta are generally friendlier than United’s crews, although they do have some great crews and they are generally better than they were in Smisek’s time (Oscar Munoz really did his bit here).
- They have better technologies that lead to a positive customer experience – a better mobile app, better automated communication with customers in case of delays, and a better way to hold plans for connecting travelers when it won’t result in delayed arrivals for everyone else (“ConnectionSaver”).
- Ultimately, it’s their network – they expand capacity domestically and transport passengers worldwide. United is part of the largest global alliance and can take you to more places around the world than other U.S. airlines.
United is a better airline than it was a decade ago, with a frequent flyer program that isn’t as good as it was a decade ago. They have a clearer strategy — one that can certainly succeed, but isn’t without risk. It assumes continued growth in air traffic in the United States and from the United States to the world. But the question remains whether the world will stay on an “up and right” curve, or whether United can improve financially fast enough to weather disruptions along the way.
