Winston Churchill said when the tide began to turn in World War II, it wasn't the beginning of the end, but the end of the beginning. United CEO Scott Kirby says the airline industry is at a similar inflection point. Is he right?
United Airlines says it is poised “to lead the recovery,” despite reporting a staggering adjusted net loss of $2.4 billion on revenues that were down 78 percent for the quarter ending September 30. The airline’s executives say it is taking a realistic approach to the recovery, even as United expects its core business travel to remain severely depressed for the next several years.
“Emotions like pessimism, hope, and fear have no place when you’re making decisions that involve the lives of tens of thousands of employees and the future of a great airline,” CEO Scott Kirby told analysts on Thursday during the company’s third-quarter earnings call. “You just have to be objective and realistic.”
The company’s executives were, however, much more upbeat than they were in the last quarter, which Kirby called its most difficult in almost a century.
United began furloughing 13,000 employees on October 1, when federal payroll support for airlines expired, a day Kirby called “my toughest day as a CEO.” Should travel demand rebound, Kirby said United will begin recalling those employees.
Business Travel Will be depressed until 2024
Before the pandemic, business travel was United’s strength. With hubs in New York, San Francisco, Washington, D.C., and Chicago, United had been well positioned to capture a large share of premium business traffic, particularly to and from the U.S. But this market is not expected to return to 2019 levels until 2024, Kirby said. “We’re anxiously watching … the occupancy rate of New York City skyscrapers, and when that number starts to go up, I think you’re going to see business travel start to rebound,” added Chief Commercial Officer Andrew Nocella.
Kirby is optimistic that business travel will rebound, even if it the nature of the market changes: Instead of yesterday’s road warriors, flying across the world for conferences and meetings, tomorrow’s business travelers could be remote employees returning to the head office frequently. And there always will be a need for business travel. “I’ve been fond of saying the first time someone loses a sale to a competitor who showed up in person is the last time they try to make a sales call on Zoom,” he said.
Leisure travel becomes more important
Faith that the business-travel market will return in several years is cold comfort to United now, however. The airline is retooling its network to focus on leisure travel, the segment of the market that is showing signs of recovery. Unusually for the hub-and-spoke airline, it is offering direct flights between non-hub cities to leisure destinations like Florida, and it expects to add more in the fourth quarter. It is moving flights away from its coastal hubs to its hubs in Houston and Denver.
It is also focusing on Hawaii, where United has long had a large presence. The airline is offering rapid-result coronavirus tests to passengers leaving for the islands from San Francisco, allowing them to avoid Hawaii’s 14-day quarantine. Now, the tests cost $250 if taken on the day of departure at the airport, but United thinks that eventually will fall as low as $15 as more tests are developed, President Brett Hart said. This program eventually could be expanded to more departure airports. Routes to Hawaii, before the pandemic, comprised just 4 percent of United’s domestic total, but in the fourth quarter, Nocella expects that to rise to 9 percent of its domestic flights.
Travel has entered a steady state, United believes. In June and July, bookings corresponded inversely with the pandemic: As cases spiked, bookings fell. Now, United sees bookings are not correlated with coronavirus outbreaks around the country.
The company believes that a vaccine will be available and widely distributed by the end of next year, and until then, the road to its recovery will be fraught with “twists and turns,” Kirby said. Quoting Winston Churchill, he added, “This is the end of the beginning.”
Fleet and the numbers
United reported third-quarter revenues of $2.5 billion, down 78 percent from last year. Passenger revenues fell by 84 percent to $1.6 billion. Cargo revenues, however, rose 50 percent to $422 million. United, like many of its competitors, has broken with its long standing practice and has operated several cargo-only flights since the onset of the pandemic. Its daily cash burn in the quarter was $21 million, a figure it hopes to reduce to $15-20 million in the next quarter. United operated 65 percent of the capacity it planned to operate in the quarter. It expects capacity to plateau at about 50 percent of 2019 levels until the widespread adoption of a Covid-19 vaccine.
United’s international network took a particularly big hit in the quarter, as travel restrictions around the world have destroyed demand. The airline’s international capacity was down 77 percent from 2019. Those routes remain valuable, though. United secured a $5.2 billion government-backed loan from the Treasury Department, using its international routes as collateral. The carrier plans to take another such loan — through a facility provided in the CARES Act — for $2.3 billion.
United does not expect to add the Boeing 737 Max back into its fleet until next year, even if the Federal Aviation Administration approves the grounded jet’s return to service by the end of this year. The carrier has returned 150 temporarily grounded aircraft to service, but it still has 450 aircraft parked in the desert.
“We’ve got 12 to 15 months of pain, sacrifice, and difficulty ahead,” Kirby said. “But we have done what it takes in the initial phases to have confidence.”
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Photo credit: United Airlines is taking a super cautious and realistic approach to the recovery. 383493