Scott Kirby Seems to Enjoy Being Correct
He said he's amused by any ULCC that is betting it can make money in New York. Anyone know which airline he might be targeting?
Today’s post is sponsored by
Skailark’s digital twin (or data-image), is an independent outside-in view of the Aviation industry. It is continually updated, incredibly granular, well-structured, and easy to use. Skailark’s Airline Economics product supports global airlines’ strategic activities, such as planning, competitive benchmarking, cost optimisation, continuous improvement, M&A, and transformation via flight-level costs and profitability insights. Clients include IAG, American Airlines, jetBlue, Finnair, and many of the industry’s key advisory firms.
Dear readers,
Amazingly, United (by some measures, the world’s largest airline) does not fly the premier route in the U.S. — JFK-to-LAX. But starting on May 1, Frontier will fly it once a day, and fares start at $49.
United CEO Scott Kirby made clear (at least to me)1 on Wednesday during his airline’s fourth quarter earnings call that he believes this is an absurd move. And it’s even weirder because this is not an isolated occurrence; Frontier apparently sees opportunity in New York, where it added two other high-profile routes earlier this month. Frontier, which will try just about anything, also has been opportunistic in other major markets, including some very congested airports, like San Francisco, where it now competes with United to my hometown airport of Burbank.
"I just don't see how it's possible to be a low-cost carrier and fly profitably to the New York airports, or Chicago, or Los Angeles, or San Francisco," Kirby said.
To explain, he used his favorite Kirby-ism: “it’s just math.” The problem, Kirby told analysts, is that the three big New York airports are expensive, with an average cost per passenger of $48. United (and American, Delta, and even JetBlue) can charge enough to make money. But Kirby said the average ULCC fare at LaGuardia, JFK and Newark is $67.
“When an airline is spending 72 percent of their fare on airport costs, it's hard for me to imagine that they could ever be profitable in those airports," he said.
Kirby wasn’t just having fun with this anecdote, of course. The demise of the ULCC (along with sustained and robust demand on long-haul routes) is core to his thesis of where the industry is going. As Frontier and Spirit continue to falter — because as their costs rise, revenue does not keep up — Kirby is betting these airlines will be in even worse shape.2 And that should create more opportunity for United and other premium airlines to increase their share of the domestic market while charging more.
Last year, Kirby predicted that ULCCs eventually will go out of business. That hasn’t happened, but Spirit filed for bankruptcy protection in November, and while it should emerge in the first quarter, I have yet to speak to anyone in the industry who has much faith in the airline’s plan. Frontier is in better shape, but Kirby was adamant that he doesn’t expect JFK or other big markets to save ULCCs.
“Thebusiness model just doesn't work because the governments in those entities have priced low-cost carriers out of the market,” Kirby said. “And the only way to solve that is to not fly it. That didn't mean they'll do it overnight. There will be some ups and downs along the way. There'll be ego3 involved in that. But ultimately, it is math, and it is going to come out because it cannot be profitable.”
What else did Kirby and his colleagues have to say on United’s fourth quarter call? Read on to find out.