United Says the Worst is Over
The airline reported a material improvement in demand in the past three weeks but Scott Kirby said not all airlines will benefit equally.
Dear readers,
Just as quickly as U.S. airline demand dissipated in February not long after President Trump took over and businesses and consumers were wary of a tariff-happy future, demand for travel has returned over the past three weeks, United CEO Scott Kirby said Thursday on the airline’s second quarter earnings call. But as is his custom, Kirby said two airlines will disproportionately benefit from this increased spending on air travel because they have structural advantages. And yes, one of them is United.
First, though, the good news for all airlines: United executives said U.S. airline demand markedly improved early this summer because U.S. consumers have felt more comfortable about political, economic and global events.
"Demand was weak for the last five months due to high levels of uncertainty for both businesses and consumers," Kirby told analysts. "In the past few weeks, the level of uncertainty has declined. The tax situation is settled after the reconciliation bill passed, the geopolitical situation in the Middle East appears to have stabilized, and while tariffs are not yet certain, I think the market and most businesses have a much better read on how they'll manage in a narrower range of outcomes. And encouragingly, that higher level of certainty has translated into a meaningful inflection point in demand."
During United’s earnings call, Kirby and chief commercial officer Andrew Nocella were about as bullish as I have ever heard them, because trends in both demand and supply are headed in the right direction.
“We've seen an improvement in booked revenue, including a double-digit acceleration in business demand,” Kirby said, cautioning that it’s only a three-week-long trend. Nocella added that, for the first time since February, United’s domestic ticket yields are trending above last year’s numbers.
"Demand feels to us like it has inflected upward and is returning toward the normal trend line we expected at the start of the year," Kirby said.
Isn’t this great for all airlines?
Ten years ago, this would have been a wonderful situation for all airlines. After five unexpectedly weak months, the U.S. industry may be entering a strong macro-environment, with all the key levers — supply, demand, and fuel prices — favorable to producing strong airline profits.
But by now, you should know Kirby’s argument: that two airlines (Delta and United)1 are so structurally better than the rest that they will reap outsized rewards. Kirby says they’re the only two carriers that people go out of their way to fly, regardless of price.
Delta and United also have the two strongest global networks and an outsized share of the managed corporate business that Kirby said is on the upswing, recovering even faster than leisure.
“I think one thing that's becoming even more clear … is the dispersion of results in the industry, and the strength of the two brand-loyal airlines that are really winning and everyone else losing,” Kirby said. “And if I dig deeper into it, and I look at every airline that's not named United or Delta, I can find at every single one of them a double-digit percentage of their route network that loses money.”
As usual, Kirby and Nocella saved their sharpest comments for commodity airlines that don’t have a competitive advantage on product or network. They call these carriers — which include Frontier and Spirit (and probably Southwest, too) — low-margin airlines. In the past, these carriers competed well because they had a massive cost advantage, but much of that gap has gone away since the pandemic.
"Low-margin airlines without strong brand loyalty and diversified revenue streams are cutting unprofitable flying," Nocella said. "We believe this was always an inevitable outcome, an outcome that we expect will be uniquely beneficial to brand-loyal airlines with much higher margins and well-diversified networks."
United’s earnings will take some time to recover
Considering the crummy demand environment for all but the last few days of the second quarter, United did pretty well in the period. It reported net income of $973 million (down 26.4 percent year-over-year) on total revenues of $15.2 billion. TRASM fell 4 percent year-over-year, but fuel prices fell 15.3 percent per gallon.
The third quarter should be solidly profitable as well, but Kirby and Nocella warned investors that the airline won’t get the full benefit of demand improvement until late this year because United had sold half of its July-September capacity as of July 1. And many of those seats were sold cheaply, when United was prioritizing load factor over yield.
“I don't think that's going to be unique to United particularly in the domestic environment, and that has created some more lower yields,” Nocella said.
Kirby and Nocella painted a rosier picture for late in the third quarter and into the fourth quarter, because many U.S. airlines have cut substantial capacity from August through December, fearing demand would not recover so quickly.
United has calculated domestic industry supply will be down slightly in August and September — a marked change from a few months ago, when supply looked like it would rise about 4 percent year-over-year. (Delta offered a similar supply estimate last week.) And in a slide shared with employees this week, United bragged that it is adding the most capacity this fall among U.S. carriers, setting it up for an outsized benefit if current demand trends hold.
"From a supply perspective, it's déjà vu all over again," Kirby said. "This is almost the exact same set-up that we had a year ago at this time, with weak RASM and results across the industry, leading to supply cuts starting in mid-August, leading to better margin results, which then led to strong stock price performance."
With demand steadily improving, United offered more concrete guidance for investors, predicting full-year earnings per share between $9 and $11. You may recall that after the first quarter call, United gave two options for EPS estimates — a “stable environment” scenario of $11.50 to $13.50, and a recession scenario of $7-$9. As neither scenario unfolded, United opted for a fresh estimate.
“I'm very excited,” CFO Mike Leskinen said. “The bookings over the last three weeks have been very strong. And if everything continues on that trajectory, I think $9-$11 will prove conservative.”
Did Kirby Says He’s OK Being Delta’s No. 2?
I think the discussion around demand was the most newsworthy part of the call, because the how-bad-can-it-get question has been on everyone’s mind since February, when demand fell off precipitously and without warning. But as an insider, I’m more intrigued by the rivalry between United and Delta.
Jamie Baker of JP Morgan asked Scott Kirby how United eventually could have higher margins than Delta. Kirby, who has always told me he wants to win at everything, responded that besting Delta is not a major priority.
"My focus is entirely on returning United Airlines to solid double-digit margins and higher absolute margins, as opposed to what we do relative to Delta," Kirby said. "I think we are the only two airlines that have a shot. We're the only two brand-loyal and revenue-diverse airlines."
In his question, Baker explained all the advantages Delta has over United, including the Atlanta hub, non-union flight attendants, a profitable MRO business, and a giant contract with American Express, that might make the margin gap permanent. Kirby acknowledged Delta’s strengths, including its Atlanta hub, but said United also has many advantages, particularly the long-haul operations in San Francisco, Newark, and Dulles. Still, he steered clear of the key premise of the question, declining to say United can use those levers to best Delta on margin.
"We're going to wind up with similar margins,” he said. “But I'd much rather us have 13 percent margins and Delta have 13.5 than us have 10, and Delta have 9.5."
Perhaps I'm reading too much into it, but when I heard his answer, I interpreted it as a reminder to Delta that United means no harm, and perhaps Delta president Glen Hauenstein might wish to attack weaker competitors rather than mess with United. It’s of course timely, given Delta's planned expansion (announced this week) in my home market of Los Angeles. In June 2026, Delta will add Los Angeles-Hong Kong (a twice-daily United market) and Los Angeles-Chicago, which United flies at least 10 times a day, most days.
My thoughts on this were further solidified after CNBC’s Leslie Josephs asked a sharp question to Kirby about Delta’s Los Angeles expansion. I found the end of Kirby’s answer a bit telling. What about you?
"We fly 6,000 flights a day, so a couple new routes aren't that big of an issue for us," he said. “But I guess I feel complimented when other airlines feel like they're worried about us getting ahead and have to fly routes that are going to lose money for them."
I understand that this is just two routes, but you know how this could go — both airlines will see reduced margins in Los Angeles, and United will probably retaliate somewhere to attack Delta's margins on its stronger routes. And then maybe the two airlines will annoy each other so much that they start fighting each other in New York, and then things can get ugly pretty fast.
I know less about what’s in Hauenstein’s head because he’s quiet about which competitors he wishes to crush. United, though, is much more transparent, and all signs suggest Kirby would prefer to go after American than engage in skirmishes with Delta. And on the front line of that battle (that’s Chicago O’Hare), United told employees this week it is winning, according to these slides shared internally.2
Here are some other things I found interesting from United's call:
United executives identified the same two transatlantic trends as Delta. First, while Europe routes remain solidly profitable this summer, they’re not as lucrative as in previous years. United’s transatlantic passenger RASM, which Nocella said is 23 percent higher compared to before the pandemic, decreased by about 2.3 percent year-over-year in the second quarter. Second, the shape of transatlantic demand has changed: More people are moving trips from peak summer to the shoulder season. As a result, United doesn't have as much pricing power in June and July as it once did. "Margins in these historically off-peak periods are up, while margins in peak months, which are still high, are down," Nocella said.
Asked by an analyst if United's relative summer weakness in the transatlantic market is related to European concerns about visiting the United States, Nocella replied it is not. "United disproportionately boards U.S citizens," he said. "And so any changes in demand from outside the United States into the United States, the brunt of that change is more felt by foreign flags. ... Our demand to Europe, we're having a very strong summer, and we're really happy with the results. It could always be better, but it's another strong summer to Europe, particularly to Southern Europe.”
With its big business market hubs, United has larger international business class cabins than its domestic competitors, and that will continue with a new, extra-premium 787-9 intended to fly from coastal hubs to major business markets, including Singapore and London. That airplane will have 64 business class seats, including eight business class studios that come with more room and extra product attributes. By comparison, though, the premium economy cabins remain relatively small, with 35 seats on the super-premium Dreamliner, and 21 in the standard 787-9 configuration. Nocella teased larger premium economy cabins in the future. "That's the cabin, I think, that's generating very good returns and the one that we'll probably lean more into going forward," he said.
By now, you know Kirby loves to make statements about the death of LCCs. He dropped a zinger in this call, telling analysts that he believes Ryanair is "the only remaining successful LCC around the globe." The reason: "They're the only LCC that stayed true to their founding principles and doesn’t fly to high-cost airports like London Heathrow or Charles DeGaulle." If pressed, I suspect Kirby might add others to the list, but perhaps niche carriers like Sun Country or European holiday airlines are too small to register.
United struggled operationally and commercially at Newark in the second quarter, but COO Toby Enqvist said, "Newark isn't just back to normal; it's running better than ever." Unfortunately for United, not all customers know that yet, and some are still avoiding the airport. Because of the "extensive negative news coverage," Enqvist said United's overall margins will be one point lower than they would otherwise be in the third quarter. However, that's better than in the second quarter, when the margin loss attributable to Newark was 1.2 points. "The good news is Newark's share of New York city sales has now largely recovered in July," Nocella said.
On July 7, United paid the final $1.5 billion balance on the MileagePlus bonds it sold to raise cash during Covid. Leskinen said it was the airline's most expensive fixed-rate debt, which in itself is a good reason to pay it off. But JP Morgan's Baker wondered if there was a strategic element, asking if United now has more flexibility with its loyalty program since it has no debt. Leskinen didn't directly address strategy, saying only that he plans to offer increased disclosures on the program soon "so there's more transparency on the earnings, the resiliency, and the earnings growth of that business.” He added that "if the value is not recognized, we certainly will take more drastic steps, but the focus right now is only segment reporting. The un-encumbering of the business does give us optionality."
That’s all for today. Today’s post is a rare non-paywalled story, so if you like it, please share it with your network.
I’ll be back next week with more earnings excitement.
Sometimes he lets Alaska into this group, but not on Thursday.
Just a reminder that you all should leak your internal slides to me — especially the ones that make your airline look good.
"any changes in demand from outside the United States into the United States, the brunt of that change is more felt by foreign flags" except of course that they share revenue across the Atlantic with Lufthansa, SWISS, Austrian Airlines, Brussels Airlines, and Eurowings (and Air Canada)... just as foreign flags like Air France KLM, British Airways, Iberia et al share revenue with their U.S. joint venture partners.