Six Takeaways from United's Earnings call
Among them: Spirit and Frontier already are down, but United executives suggested they may have farther to fall, as United poaches their customers.
To start, a quick reminder: I'm moderating at the Skift Aviation Forum on Nov. 1 in Fort Worth, where I’ll interview three of my subscribers — Andrew Nocella, United’s chief commercial officer; Jude Bricker, Sun Country’s CEO; and Charles Duncan, Norse Atlantic’s president — along with Air Lease chairman Steve Udvar-Hazy and Southwest CEO Bob Jordan. If you would like to suggest a question, please reply to this email, but just remember my policy: no softballs.
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Now, for today’s post: six things you should know about United’s third quarter earnings call. United reported pre-tax income of $1.5 billion, with a pre-tax margin of 10.3 percent — solid figures for a quarter in which other airlines called out softness. Overall, United’s numbers were very similar to Delta’s, according to numbers calculated (and sent to me) by Skift’s Airline Weekly’s Jay Shabat, the best industry analyst around.
ULCCs are in trouble, and United executives think they know why
Good executives prepare earnings call answers in advance, but few are as thorough as Nocella, who seemed to relish a question from J.P. Morgan’s Jamie Baker about why United thrives while Frontier and Spirit struggle. Here were Nocella’s key points.
The cost gap has shrunk. ULCCs no longer benefit from as much labor arbitrage, as pilots expect market wages regardless of where they work. In addition, Nocella said, ULCCs have curbed utilization because they face the same constraints as every airline, including air traffic control delays. And when utilization falls but fixed costs remain constant, unit economics suffer. Nocella reminded analysts of a favorite United talking point: “It's impossible to run your airline like it is 2019.” That means no matter what ULCCs say about ramping up utilization, they may continue to struggle with it.
They've run out of obvious markets. Not long ago, big ULCCs had an obvious playbook — they could connect many large and medium cities with Orlando, Las Vegas and Cancun, while undercutting legacy airline fares. But these markets now have too much capacity, Nocella said, and the industry is seeing “market saturation,” as unit revenues fall. “There are only so many seats that Florida, Cancun or Vegas can support in such a short period of time," Nocella said.
The model requires large airplanes. David Neeleman’s Breeze is an outlier, because he prefers smaller airplanes with lower trip costs. But Frontier and Spirit increasingly rely on Airbus A321neos, even though not all markets can support all those seats year-round, at least without severe discounting. When United encounters soft demand, it can alter its revenue management strategy to accept more flow traffic. But ULCCs have less (or no) connectivity, which “just creates low marginal RASM,” Nocella said.
Despite all the headwinds, ULCCs keep growing. It’s because they have no choice, Nocella said, since growth helps them manage unit costs. But there just aren’t many logical growth opportunities left, according to Nocella, and others I have spoken to recently. “2024 marginal growth in markets will absolutely be no better than 2023,” Nocella said, before sharing a nice zinger: “No airline network team would say, ‘let's add the bad markets in 2023 so we can save the good ones for 2024.’”
Even if the new routes made more sense, they’d still be new. We know it takes new markets a while to spool up, even the eventual winners. And all this growth means a significant portion of a ULCCs network will be under development. “Very fast growth rates simply create a high percentage of new capacity, which by its nature in the best of times is below average,” Nocella said. Less than 1 percent of United’s fourth quarter ASMs will be in new markets compared to 2019.
OK, that’s what United had to say about the low-cost competition. Read on to learn about United own’s business, including some comments on international expansion and market segmentation.