The Simple Theory Behind United's International Expansion
Many wounded carriers are no longer interested in dumping loss-making capacity into the United States. United is banking they won't return for awhile.
What I like about United's international growth strategy is that the thesis is easy to understand. You don't need to perform financial wizardry or even calculate GDP growth rates of secondary Asian cities to know why United wants to send more airplanes abroad. You may not agree with the approach, but you only need to grasp three issues to understand why United loves long-haul expansion.
First, United has hubs in the biggest U.S. markets, where long-haul passenger and cargo demand is strongest. Second, many international airlines shrunk during the pandemic, and since it is not easy to find new widebodies, they might not be able to reinstate U.S. capacity, even if they wanted. Third, American and Delta have different focuses, and they don’t want to challenge United on many routes. They don’t even have the aircraft to do it.
In an industry in which there’s rarely a dearth of competition, that’s a nice opportunity. But there is one potential problem, and I was glad to hear executives discuss it Thursday on United’s second quarter earnings call. (United reported net income of $1.1 billion on record quarterly revenues of $14.2 billion.)
Here’s the issue. Yes, competitive capacity is down, but during boom times, almost every long-haul international carrier decides it must fly to New York or Los Angeles and maybe even to Chicago, San Francisco, or Washington, D.C. It doesn't matter how much money the airline loses doing this — and many of them lose their shirts — or how low load factors go. Someone at many international airlines, or at the ministry of aviation, decides the flag carrier must have a nonstop flight to the world's largest economy. That might not happen next year, but you could see how this thinking could return in 2026 or 2027.
I'm wary of any 'this time is different' commentary. But United chief commercial officer Andrew Nocella told analysts the landscape changed during Covid — perhaps permanently, and certainly temporarily. In addition to lacking aircraft, many of these airlines earned close to zero revenue for a couple of years, and they may not be rushing to add loss-making routes. Executives may not remember loss-making follies from decades ago, but they do recall the last few years and may not wish to repeat it.
"We think there's been a structural change in the international capacity relative to GDP that's very different from 2019, and it will take years of changes of fleet growth by the industry and us to actually make that change," Nocella said. "There's nothing that we see that's really going to change the structure back to what it was pre-pandemic anytime soon, if ever."