In a video message to employees, United Airlines CEO Scott Kirby analyzed industry-wide earnings figures and argued that United Airlines’ future is bright, even if a recession hits and the entire airline industry stumbles. Unlike in more public contexts, Kirby names names here. But there are still (as he himself admits) warning signs that United is now anticipating and that could soon dampen Kirby’s optimistic outlook.
United CEO Scott Kirby analyzes the airline industry and the future of United Airlines
Kirby begins his video, which was viewed by Live and let us flyby thanking employees for their work in stabilizing operations during a very turbulent summer for the travel business. He then turns to earnings, noting: “We have now completed the second quarter earnings reports and now know exactly where everyone in the industry stands.”
About winners and losers
Kirby believes that the airline industry is splitting into two classes, with United, Alaska and Delta alone in the top class:
“The industry has really split and there are three airlines at the top, United, Alaska and Delta, and then everyone else. I mean, that’s pretty remarkable. American Airlines is just going to break even. Southwest Airlines is actually going to lose money after decades as the industry leader. They’re actually going to lose money here in the second best quarter of the year.”
To illustrate, he presented a chart showing the pretax margin forecast for the third quarter of 2024 for eight major U.S. airlines. United, Alaska and Delta are all at 9%. At the other end of the spectrum, Spirit is forecast to have a pretax margin of -30%.
UA: pic.twitter.com/hGmoQzwmHb
— JonNYC (@xJonNYC) 14 August 2024
While American and Southwest were particularly highlighted, Spirit Airlines received the most contempt:
“And the low-cost airlines are just a disaster. These are numbers that will kill many 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 were actually losing $4.5 billion in a single quarter.
“It’s really remarkable how the industry has changed: There are now a few airlines at the top and then everyone else.”
He is right that Spirit’s current trajectory is unsustainable, even though the airline has responded by completely turning its traditional business model on its head.
About absolute numbers
While United has enjoyed relative success compared to its competitors, Kirby lamented that net margins are lower than last year and also lower than 2019, the last year before the pandemic.
“We are outperforming everyone else, but if you look at our absolute results, they are still down compared to last year and compared to 2019.”
Does this mean that a recession is imminent? Kirby suspects does not matter:
“Many of you ask me if we are heading for a recession. You have read about it in the newspapers. You may have seen the volatility in the stock markets. People are worried about what this means for the future. I want to say two things to you about that.
“First, at United Airlines, we set a goal of never again imposing system-wide furloughs. And we accomplished that, I’ve talked about it before, by having more cash on the balance sheet, leading the industry in profit margins and continuing to pay down our debt. We’ve still done those things.”
Here I believe Kirby is being hopelessly optimistic. It’s not a Doug “Nostradamus” Parker joke like “American Airlines will never lose money again,” but if there is another rapid economic downturn, pandemic, or other natural or political disaster, I would certainly expect system-wide furloughs.
(On the other hand, Kirby is undoubtedly relying on bailouts again, as he has previously admitted.)
> Learn more: Doug “Nostradamus” Parker: AA will never lose money again
> Learn more: CEO of United Airlines relies on future government bailout packages, but only for the strong
Kirby believes that growth can continue even in a recession:
“That’s put us in a position where, as we now move into what could be a difficult economic environment, we can maintain our plan, continue to focus on United Next, continue to grow, continue to hire people and really stay the course, while the rest of our competitors in this case are the ones that have to start shrinking. Almost across the board, the airlines on the previous graph are starting to shrink. Almost across the board, they’ve stopped hiring or many of them have already started to furlough employees.”
I just can’t imagine that happening. Yes, Kirby is right when he says “United is in a very different position than the rest of the industry” (though he would probably include Alaska and Delta in that category as well), but United won’t grow if that growth increases losses…at best, it will delay growth. I can’t imagine Kirby getting 500 new planes if demand stagnates or the economy starts to contract.
And the competition is so strong that I am not convinced that there will be any capacity reduction at all this winter. If one airline reduces its capacity, another will step in and see the (relative) opportunity to capitalise on it.
On the way to success
Ultimately, Kirby believes the key is Execution:
“What do we need to do to sustain this? We need to implement, implement, implement. We need to keep things going as before. We need to run a smart airline. We need to stick to our strategy. We need to look after our customers. We need to look after each other.
“If we can do that, the future truly belongs to United.”
Yes, of course – that is obvious. The key is in the details. What does it mean to have a clever airline? Does that mean MileagePlus will be further devalued? What does it mean to take care of customers? Does that mean cutting corners on food and beverage?
One thing is certain: the future is as clear as mud. The coming months, as the last few weeks of the presidential election have shown us, will be anything but predictable.
DIPLOMA
Kirby names names and prophesies doom for Spirit Airlines while praising United along with Alaska and Delta. While I agree with Kirby’s analysis on the whole, I think he is far too optimistic about what will happen to United should demand decline, and underestimates that, like a game of whack-a-mole, when one airline pulls out of the market, another airline will pop up.
