Ordering large planes from United Airlines has benefits and risks

United Airlines has placed the largest aircraft order in its history, and one of the largest ever in the US airline market, signaling a very optimistic outlook for a return in travel demand. The order, for all narrow-body aircraft, will include aircraft for both growth and replacement. The airline has been actively marketing the benefits of this order since its announcement, with CEO Scott Kirby touting that the main idea behind the command is for an improved customer experience. This move is the most aggressive United have made and follows an order a few weeks ago for 15 supersonic jets from a new company called Boom.

There are a lot of benefits to this new order for United, including a relatively quick refresh of a fleet that has grown quite old. The two new aircraft models, the Boeing 737MAX and the Airbus A321NEO, are both highly efficient and fuel efficient aircraft that will be better for the environment than United’s current fleet. But this order also carries significant risks and has implications for US domestic capacity, competitive effects, airline labor markets and the regional airline industry.

Replacement of regional jets

According to United’s press release, many of these planes will replace the 50-seat regional (RJ) jets. This has a lot of interesting implications. These replacements will result in a gradual increase in size per departure relative to RJs, meaning that the schedule may have to change in terms of frequency, otherwise many more people will be needed for each flight. RJs are flown by regional airlines on a cost-plus basis for United, making these flights a much lower cost per trip than a flight flown by United. Part of the reason is that regional airlines use a workforce not covered by United’s unions and they work at generally lower rates of pay. When a 737 replaces an RJ, it is now United’s pilots who fly the plane and the regional carrier must redeploy its plane with United or find something else to do with it. The larger aircraft will use more absolute fuel although probably less fuel per seat, and because it is heavier, it will cost more to land at most airports and it will be more expensive to insure.

Other expected fleet movements

Not too long ago, CEO Scott Kirby said positively that United would keep more widebody jets than its main competitors, and he saw this as a force for the return of long-haul business travel. I don’t know if he still believes in it, as the 737MAX-10s and A321NEOs that have just been ordered can replace the carriers’ Boeing 767 fleet, if not more. Using a narrow-body long-haul aircraft instead of a widebody significantly reduces the financial risk of a flight and allows more destinations to be added from hubs like Newark and Houston. The order suggests United will soon announce a retirement schedule for some of its older jumbo jets.

However, many of these new planes will likely replace older narrow-body planes as well, like their Airbus A319s or older Boeing 737 models. This order gives United the ability to simplify its fleet while making it more efficient, which means quickly decide which aircraft will leave the fleet because of this new capability.

Continuous creation of hubs

Over the past few years, United has been steadily developing their hubs as part of a strategy that works well for them. For example, from their hub in Denver, they fly to Los Angeles, but also the low cost carriers Southwest and Frontier. United is obliged to match the low prices set by these more efficient carriers on this route. By adding service from Denver to more medium and small towns, like Kalispell, MT for example, they can be less reliant on low cost local traffic from Denver to LA and connect from Kalispell to LA instead. Using this idea, United built their hubs not only in Denver, but also in Houston, San Francisco, Chicago and Newark.

This new fleet order will support this strategy, but will also make power more expensive, with a new United aircraft instead of a much cheaper regional RJ. This means United may need to change the “bank” structure of its hubs (the number of times per day that planes arrive for passengers to connect) as they will be using their frequencies with larger aircraft. Alternatively, they can add even more cities, but these should support the larger cabin size of the new gear. This sharp increase in the size of average departures will affect their schedules in a way that will be worth watching.

Impact on unit costs

In some ways, this order helps lower United’s unit cost of production by bringing in more efficient planes that will use less fuel and, for a while at least, require less maintenance. However, they are also putting pressure on their own labor rates, as they will need significantly more pilots, flight attendants and mechanics paid at United’s rates to take over the new plane. which represents a sharp increase in costs compared to the regional food which is delivered, replaced.

The cost of labor is become a major economic stake in general, and therefore committing to high cost capital that will put even more pressure on wages is a risk to United’s cost structure. At the same time as they add a lot of seats per departure, they also significantly increase the costs of their hub feeding and this will ensure them to remain heavily dependent on business trips which may or may not come back entirely. The upgrade also puts pressure on an already strained balance sheet, adding billions in debt as most airlines focus on repairing the balance sheet after leveraging to stay alive during the pandemic.

Curious response to competitive dynamics

This increase in the number of seats per flight, the emphasis on hub connectivity and pressure on unit costs comes in a competitive environment where low cost carriers are growing faster and adding nonstop routes that fly over hubs. major carriers. United appear to be focused on beating American and Delta in the airline big game, but in doing so makes it harder for them to compete with the fastest growing segment of the industry.

They can argue that the marginal cost of the extra seats gives them the tool they need to be price competitive, where appropriate. This may be true in some cases, but when a carrier cannot price it because of its competitive ability, it puts it in a precarious position for at least part of its network. United does not dominate their hubs in the same way that Delta and American do, which means they have more competition for customers at all points of the price spectrum. They seem to be betting that customers will choose United, even at a higher price, if their service is good enough. The other airlines that have made this bet have not always been successful.

Customer experience

The most interesting thing about United’s announcement is how they positioned the new order. Rather than saying that it will make them greener (which will be the case), or consume less fuel (which will be the case), or be more reliable (which will be the case), or even more profitable (uncertain ), CEO Kirby stressed that this upgraded fleet will provide a better customer experience, even focusing on the individual screens at each seat being perfect for families. That’s a big bet to make, as most customers bring their own screen on board anyway and when the backrest screen breaks, the whole flight is ruined for some customers. What United seem to lack is that pleasant employees and proactive responses to unforeseen circumstances are the friendliest things an airline can do. A late flight, with rude or indifferent service from the airport and flight attendants, is not a good experience with a new aircraft and seat screen. Delta has the oldest fleet among the three major US carriers. but gets a high score on customer service because they do sweet things so well.

How to think about this command

This new order from United is great news for the company and for US Airlines. It is stepping up competition among the major carriers and making a very optimistic statement about the return of business travel to support this additional capacity. Choosing for certain costs over potential income is a big risk. United buys great equipment which is probably acquired at very attractive prices which reduces that risk somewhat and their hubs are in big cities which can probably support all of these new seats. But the pressure on costs, especially labor costs, and becoming less dependent on lower-cost regional food places them in a position where traffic must not only come back, but choose them instead. than their competitors. While Delta and American will take note, low-cost airlines in the United States will likely be even more emboldened to expand, knowing that these measures put pressure on United to make a very low fare the antidote. perfect.

About Theresa Burton

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