United Bullish on 2022 Growth and Profits Despite Variant Fears
United Airlines may do what few thought was possible just a year-and-a-half ago as the coronavirus pandemic brought global air travel to a near standstill. Barring an unforeseen reversal of the recovery — like maybe the rapidly spreading Delta variant — the Chicago-based carrier is gearing up to fly more next year than it did in 2019 in what is a significant vote of confidence in the travel recovery.
“We expect 2022 capacity to be higher than in 2019,” United Chief Financial Officer Gerry Laderman said during the airline’s second quarter earnings call on Wednesday.
That outlook is possible based on a number of factors, including United’s decision to retire few aircraft during the crisis that allows it to recover faster than many of its competitors and what it sees as a coming inflection point in the business travel recovery this fall.
And that’s not to say the United of 2022 will look like the United of 2019; there will likely be more domestic, European and Latin American flying and less across the Pacific than before. Executives named Florida as one market where it plans to retain some of its pandemic growth to capture more of the seemingly insatiable leisure demand to the state. But when it comes to broad recovery measures, it does not matter where the airline flies — only whether it flies more or less than it did two years ago.
United joins Delta Air Lines in seeing a potential full recovery in 2022. The latter Atlanta-based carrier could fly 7 percent more passenger capacity next year if demand permits, executives said earlier in July. That is possible with its acquisition of 36 used Airbus and Boeing jets that, along with new deliveries, cancel out the roughly 100 planes it retired in 2020. Executives at both carriers forecast a years-long recovery from the pandemic in the early months of the crisis.
The outlook did not come without skepticism. Concerns about the rapid spread of the Delta variant — no relation to the airline — around the world sent airline stocks tumbling earlier this week. And, as the industry learned early on in the pandemic, steady improvements in bookings can end as suddenly as Covid-19 infections spike — something that is occurring among unvaccinated populations.
Commenting on the variant, United CEO Scott Kirby said the carrier has seen no “impact on bookings” but added that “there will be ups and downs, and we’re prepared to deal with whatever those are.”
Early in the pandemic, United led the industry in pulling back schedules as demand tanked. Management likes to cite this fact as an example of the carrier’s nimbleness in the face of uncertainty. And on Wednesday, Laderman told analysts that even deliveries of the carrier’s massive 270 aircraft order can be adjusted based on changes in demand.
United’s outlook for the rest of the year and 2022 are about as rosy as can be expected from an airline that has weathered the last year-and-a-half. The airline continues to see steady week-over-week improvements in bookings, including a better than forecast recovery in both business and international travel since April. This has the carrier forecasting a pre-tax profit in the second half of 2021 not including the benefit of federal relief.
The return of corporate road warriors has buoyed United’s outlook. Business travel was down 60 percent in the second quarter compared to two years ago, and is forecast to be down just 40-45 percent in the third quarter, said commercial chief Andrew Nocella. United saw an inflection in the return of these lucrative flyers in June and expects another one after Labor Day when many companies have indicated they will return to the office and send more people out on the road. A further recovery inflection is expected when the new budget year begins for many companies in early 2022.
As for international travel, executives reiterated the well-worn line that every time a market reopens, bookings jump as travelers fulfill the forecasts of so-called “pent-up demand.” For United, this mostly means Europe where one-by-one country’s have reopened to vaccinated travelers and, in some cases, those with a negative Covid-19 test.
“We think the summer of 2022 across the Atlantic has the potential to be our best season ever with pent-up demand,” said Nocella.
One reason for this optimism is the aforementioned fleet choices United made early on in the pandemic. The airline kept all of its wide-body jets, including for example its smaller but older Boeing 767-300ERs, while competitors American Airlines retired all of its 767s and Delta 17 of its fleet of the jets. As United management sees it, these planes now give it a “structural” advantage over its competitors to serve more leisure-oriented markets in Europe — like Croatia — profitably. United estimated that it will have 30 incremental wide-body jets to fly to Europe or elsewhere next summer compared to 2019.
This European ramp is already on display in schedules. While United was the third largest U.S. carrier by capacity to Europe in all of 2019, it is on track to be the largest in the third quarter, according to Cirium schedules.
Costs are a growing concern for those both inside and outside the airline industry. These come as the last tranche of the U.S. government’s $79 billion in airline Covid-19 relief expires on September 30 while many other costs, including fuel, are on the rise.
United executives are unconcerned about the expiration of the last tranche of federal payroll support, which has covered the majority of its labor expenses since the CARES Act first passed in March 2020. The airline’s profit outlook for the second half of 2021 does not include these funds, which buoyed its second quarter results by nearly $1.1 billion.
The airline forecasts an eye-popping 17 percent jump in unit costs (CASM) excluding fuel and other items in the third quarter compared to 2019. Asked about this, Laderman attributed it primarily to the grounding of 52 Pratt & Whitney-powered Boeing 777s and an abundance of shorter flights versus than two years ago due to the emphasis on domestic flying. However, he is confident that given United’s planned growth and the expected return of the 777s, CASM-ex will drop compared to 2019 in 2022.
Another longer-term concern is massive capital investment United made with its blockbuster aircraft order in June. Over just the next two-and-a-half years, the airline has $17.2 in forecast commitments of which almost all of that is for new planes. Laderman said that these can be metered out if need be based on demand, though he and other executives stood by their expectation that the added revenue opportunities and savings from the new planes would outweigh the costs.
United anticipates taking nearly 200 new aircraft by the end of 2023. These include 21 Boeing 737-8s and 787-10s through the end of this year; 40 737-8s and -9s in 2022; and 138 aircraft, including its first 16 A321neos plus 122 737 Maxes, in 2023.
The 2023 delivery number alone is equivalent to adding an airline nearly the size of Spirit Airlines to United in just one year.
And The Numbers
United reported a $434 million net loss in the second quarter, including the benefit from federal relief. Without that aid, the airline’s loss would have reached $1.3 billion. Revenues were down 52 percent compared to 2019 to $5.6 billion and expenses were down 36 percent to $5.7 billion. Passenger traffic was down 55 percent on a 46 percent drop in capacity.
Looking forward, the airline expects total unit revenues (TRASM) to turn positive for the first time since the crisis began in the third quarter. Capacity is forecast to down roughly 26 percent compared to 2019. And, as noted, United expects a pre-tax profit excluding the benefit of federal aid.Subscribe Now to Airline Weekly