United Airlines has placed the largest aircraft order in its history, and one of the largest in the US airline market, indicating a very optimistic view 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. promoting that the main idea behind the order it is for a better customer experience. This move is the most aggressive United has made, and it continues an order a few weeks ago for 15 supersonic planes from a new company called Boom.
There are many advantages to this new order for United, including a relatively quick upgrade to a fleet that has gotten quite old. The two new aircraft models, the Boeing 737MAX and the Airbus A321NEO, are highly efficient, fuel-efficient aircraft that will be better for the environment than United’s current fleet. But this order also has some significant risks and has implications for US national capacity, affecting competition, airline labor markets, and the regional airline industry.
Replacement of regional jets
According to United’s press release, many of these aircraft will replace the 50-seat regional (RJ) jets. This has many interesting implications. These replacements will mean an increase in the size of the staggered function per output compared to RJs, which means that the schedule may need to change in terms of frequency or else many more people will be needed for each flight. RJs are operated by regional airlines on a cost plus basis for United, making these flights much lower cost per trip than a United flight. This is partly because regional airlines use labor that is not covered by United’s unions and generally work at lower wages. When a 737 replaces an RJ, now it is the United pilots who fly the plane and the regional carrier must either redeploy its plane with United or find something else to do with it. The larger plane will consume more absolute fuel, though probably less fuel per seat, and since it is heavier, it will cost more to land at most airports and will be more expensive to insure.
Other fleet movements are expected
Not long ago, CEO Scott Kirby spoke positively that United maintains more wide-body jets than its main competitors, and saw this as a strength for when long-haul business travel returns. I’m not sure if you still believe this, as both the 737MAX-10 and the A321NEO just ordered can replace the Boeing 767 fleet of carriers, if not more. Using a long-range narrow-body aircraft instead of a wide-body one significantly reduces the financial risk of a flight and allows more destinations to be added from hubs such as Newark and Houston. This order suggests that United will soon announce a retirement schedule for some of its older broad bodies.
In addition, however, many of these new aircraft will likely also replace the old narrow bodies, such as your Airbus A319s or older Boeing 737 models. This order gives United the ability to simplify its fleet while making it more efficient, and that means deciding early on which aircraft will leave the fleet as a result of this new capability.
Continuous hub construction
In recent years, United has been steadily building their centers on a strategy that is working well for them. For example, from their hub in Denver, they fly to Los Angeles, but so do the lower-cost airlines Southwest and Frontier. United is forced to match the low prices set by these more efficient carriers on this route. By adding service from Denver to smaller and medium-sized cities like Kalispell, MT, for example, they can rely less on low-priced local traffic from Denver to Los Angeles and instead make a connection from Kalispell to Los Angeles. With this in mind, United has been building its centers 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 feeding more expensive, with a new United aircraft rather than a much lower priced regional flight RJ. This means that United may have to change the “bank” structure of its hubs (the number of times planes arrive per day so that passengers can connect) as they will fly their frequencies with the larger caliber planes. Alternatively, they can add even more cities, but these should support the larger cabin size of the new team. This huge increase in the size of average outings will affect your schedule in ways that will be interesting to watch.
Impact on unit costs
In some ways, this order helps reduce United’s unit cost of production by adding more efficient aircraft that will consume less fuel and, at least for a time, require less maintenance. However, they are also putting pressure on their own labor rates, as they will need many more pilots, flight attendants and mechanics paid at United rates to support the new aircraft, and this is a huge increase in cost in compared to regional food that will. be replaced.
The cost of labor is becoming a major problem for the economy Overall, so 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 that they are adding a lot of seats per departure, they are also greatly increasing their center’s food costs and this will ensure that they remain highly dependent on business travel that may or may not return entirely. This update also puts pressure on an already strained balance sheet, adding billions in debt, while most airlines focus on repairing the balance after leveraging to stay alive during the pandemic.
Curious response to competitive dynamics
This increase in seat capacity per flight, the focus on hub connectivity, and unit cost pressure comes in a competitive environment where low-cost airlines are expanding more rapidly and adding nonstop routes that fly over hubs. of the big airlines. United appears to be focused on beating American and Delta in the big airline game, but doing so makes it difficult for them to compete with the industry’s fastest-growing segment.
They can argue that the marginal cost of incremental entries gives them the tool they need to be price competitive when necessary. This may be true in some cases, but when an operator cannot set their price due to competitive ability, this puts them in a precarious position for at least part of their network. United does not dominate its centers in the same way as Delta and American, and this means they have more competition for customers at all points on the price spectrum. They seem to be betting that customers will choose United, even at a higher price, if their service is good enough. Other airlines that have made this bet have not always been successful.
The most interesting thing about United’s announcement is how they have positioned the new order. Rather than saying it will make them greener (which it will), or burn less fuel (which it will), or be more reliable (which it will), or even be more profitable (uncertain), CEO Kirby has highlighted that this fleet upgrade will improve the customer experience, even focusing on individual screens for each seat being ideal for families. That’s a big gamble, as most customers bring their own screen on board anyway and when the seat back screen breaks, the entire flight is ruined for some customers. What United seems to lose is that personable employees and proactive responses to unforeseen circumstances are the most customer-friendly things any airline can do. A delayed flight, with rude or indifferent service from the airport and on-board personnel, does not turn into a good experience with a new plane and a screen on the back of the seat. Delta has the oldest fleet among the big three US airlines. but it scores high on customer service because they do the soft stuff so well.
How to think in this order
This new order from United is great news for the company and for US airlines. Competition among large airlines is increasing and he makes a very optimistic statement on the return of business travel to support this incremental capacity. Choosing certain costs versus potential income is a great risk. United is buying some great equipment that is probably being purchased at very attractive prices, so this reduces that risk a bit and their centers are in the big cities that can probably handle all these new seats. But the pressure on costs, especially labor costs, and their reliance less on lower-cost regional food puts them in a position where traffic must not only return, but choose them over their competition. While Delta and American will take notice, the low-cost carriers in the US are likely to be even more encouraged to grow knowing that these moves put pressure on United in ways that make a really low fare the perfect antidote.