United Airlines Capitalizes on Robust Demand Amid Falling Fuel Prices

After United Airlines Chief Commercial Officer Andrew Nocella wakes, he likes to monitor recent bookings to check if business remains strong. Increasingly, he likes what he sees, not only from corporate customers but also from leisure travelers.

“It’s an exciting time to kind of wake up every morning and look at the bookings that we’ve taken over the last day or two and the type of yield we’re taking,” he said Wednesday at the Credit Suisse 6th Annual Industrials Conference in Palm Beach, Florida.

What’s not to like?

Demand for domestic and European flights is booming. Asia is performing fine, including China, despite talk of a Trump-induced trade war. And Latin America, while still soft in Brazil and Argentina, is at least not as rough as a couple of years go. Plus, premium demand is hot, as corporations and individuals, flush with cash, pay a little (or a lot) extra for a more comfortable experience.

It gets better. Three months ago, airlines were so spooked by higher fuel prices — between Feb. 13 and Oct. 3, the price of oil increased by roughly 40 percent — that they slashed unprofitable flying to bolster profits. With fewer seats in the market, customers would pay more for each seat, thanks to the laws of supply and demand.

But fuel quickly has come down, to below February levels, leaving United, and its competitors, with unexpected savings. If fuel continues to stay low, airlines probably will add back some of the capacity they cut, Nocella said, but that can’t happen right away. In the next six months, that could mean higher-than-expected profits.

“I think as the price of fuel comes down, if you look out further and it’s sustainable you’ll probably see a few more [available seat miles] added,” he said. “But in the medium-term, it is just so difficult to grow faster than one anticipated. It’s easier to shrink, right? I can just pull a flight immediately. But it’s a lot harder to change the growth plan in the medium-term. ”

And if oil prices spike again, the airline will be ready, he said.

“As the price of fuel does go up from time to time, I think United Airlines has done a really good job of passing that through and recovering that amount of money,” he said. “Spikes and reductions to the price of fuel don’t really have as much of an impact as they would have in previous years.”

A short-term spike can even help an airline’s long-term prospects. U.S. airlines used the recent fuel price increase as cover to increase the price of the first checked bag from $25 to $30. Unlike ticket prices, which eventually should fall as oil goes down, fees generally are not tied to fuel prices. No matter how much fuel costs fall, revenue from the extra $5 per bag should stay.

Basic Economy Update

United remains the only one of the big three U.S airlines to ban customers buying basic economy tickets from stowing a large bag in the overhead bins.

But while American recently changed its policy, saying customers were choosing Delta Air Lines over it because of the restriction, United is content to continue it, Nocella said.

About 60 to 70 percent of customers buy up to a standard economy product when they see the restrictions of United’s no-frills fares, meaning the product is working as expected, Nocella said.

“This is something we monitor weekly to see how we’re doing,” Nocella said. “But what I will say is, look, it’s a big airline. Only a certain percentage of our tickets are basic and a lot of those people upgrade to standard right away. It’s just hard to be able to like look at the numbers and say, gosh, ‘There is a problem because of  X, Y, Z related to baggage.’ We don’t see it. What we really want at the end of the day is the product we designed.”

Nocella also noted the restriction leaves room in the overhead bins for more lucrative customers, and helps agents close flights faster, because they don’t need to worry as much about taking bags that won’t fit from the cabin into the cargo hold at the last minute.

But little any good executive, Nocella allotted some wiggle room.

“Nothing is forever per se,” he said. “But for now, I think we are happy with where we are.”

Credit Card Push

Over the past year, United has made a major push to solicit applicants for its co-branded credit card, a product that produces considerable profit for the airline.

United, which is providing hefty commissions to flight attendants to hawk the card, also worked with JPMorgan Chase to redesign it recently, adding new perks, including twice as many miles at hotels and restaurants and discounts on United in-air purchases.

So far, though, Nocella said the program has not be as successful as United has hoped. Jose Caiado, the Credit Suisse analyst questioning Nocella, said he understood card acquisitions were “solid” in the first half of the year, but spending lagged, an assertion Nocella did not dispute.

“We haven’t seeing that same momentum at the level that some of our competitors are talking about in this space,” Nocella said. “And so that is a conversation we are having with Chase. We’d like to see it better. They’re committed to making it better.”

He was vague on the problems, calling it a “a structural issue that can be fixed.”