United Sees Hope Abroad After Disappointing First Quarter Results
When the pandemic first struck in 2020, airline executives were quick to say there was no crystal ball to predict the future of the industry. Now, three years after the pandemic began and as it reaches its natural ebb, United Airlines executives say that future is coming into focus, with this year setting the path for the airline industry’s post-pandemic future.
Or at least that’s how they explained the carrier’s negative 0.4 percent operating margin in the quarter. The first quarter historically has been tough for Northern Hemisphere airlines, as the industry enters the trough after holiday demand and before the summer peak season. But United’s leaders say they are seeing something different now, and although they say it’s too early to tell if this is the post-pandemic future, they feel confident they have spotted a trend.
“You can’t run your airline like it’s 2019,” CEO Scott Kirby said. “It’s different and harder now.”
Business travel, which historically is strong in January and February has not returned to its 2019 level, especially in United’s domestic network, Kirby told analysts during the airline’s first-quarter earnings call on Wednesday. “There is a clear change in seasonality,” he said, partially driven by the decline in traditional business travel and the rise in remote work and its blending of leisure and business travel. Instead, the airline expects both business and leisure demand to peak between March and October and will flex its capacity up during that period.
Macroeconomic issues have not yet affected business travel. Domestic business demand fell by about 8 percent immediately after the collapses of Silicon Valley Bank and Signature Bank in March but rebounded within two weeks. The banking crisis did not affect domestic leisure or international business and leisure demand.
Softening business demand was offset by strong leisure demand as consumers continued spending, Kirby said, adding that he believes the economy is headed for a “soft landing” rather than a full-blown recession. If, however, the economy weakens further, United is prepared, able to adjust capacity down to reflect a drop in demand.
United’s domestic first-quarter revenues were weaker than the competition’s, due in large measure to United’s relative weakness in Florida, Chief Commercial Officer Andrew Nocella said. But the carrier is banking on its international network, which was responsible for 46 percent of the carrier’s first-quarter revenue, compared with 43 percent in 2019.
The Chicago-based airline this week announced new flights to Christchurch, New Zealand, adding to other recently announced new routes in the region, including more capacity to Brisbane and Auckland. The South Pacific network offsets United’s summer European network. Now, the carrier will deploy widebodies to the South Pacific that previously would have been scheduled for maintenance or would ply domestic routes, Nocella said.
Comparisons to the first quarter of 2022 are eye-popping, with international revenues up 106 percent, and international passenger unit revenues, or PRASM, up 52 percent. European passenger revenues rose 129 percent compared with 2022, while Latin America rose 52 percent, Middle East and India up 36 percent, and the Pacific network rose 324 percent. United expects to have more than 200 daily flights across the Atlantic this summer, Nocella said. “We’re bullish on international capacity,” he said.
But the impressive comparisons are misleading. Covid’s Omicron variant was raging during the first six weeks of 2022, and many countries had yet to reopen. United’s China network, which had been a bright spot up till March 2020, remains largely idled, at four flights per week, which Nocella said he hopes will increase by the end of this year. The aircraft that would have flown China routes now are being deployed elsewhere in the international network — on new routes to the South Pacific, for example.
The pilot shortage that threw the U.S. industry into crisis last year has largely abated, Kirby said. The carrier instead is relying less on regional aircraft and has upgauged to Boeing 737s. However, this has had an effect on domestic connectivity.
Bank sizes at United’s hubs are down 10-20 percent from 2019 at United’s major hubs, Nocella said. This is expected to improve during the year as more of the 737 Maxes United has ordered come online. Next year, United expects further growth in mainline gauge on its domestic network. “The comps year over year will be better,” he said, with the carrier focused on rebuilding domestic connectivity through next year.
The carrier is seeking to reduce its seasonality versus its competitors, Nocella added, but there is no fix in the short term. “We are simply smaller in Florida,” he said, adding that United plans to grow in Florida faster than its competitors to catch up. The introduction of more South Pacific flights in the winter will help offset some of this seasonality and is a network advantage competitors can’t match.
“We need to see how remote work schedules continue to play out,” Nocella said. “October and September were fantastic last year,” and the carrier is waiting to see how those months will pan out this year. Plans to peak the airline’s capacity in July remain unchanged.2
United reported first-quarter operating revenues of $11.4 billion, up 51 percent from last year, with operating expenses of $11.5 billion, a 28 percent increase from 2022. Unit costs excluding fuel were roughly flat and are expected to remain flat in the second quarter, despite an 18.5 percent increase in capacity compared with 2022. United’s negative 0.4 percent operating margin was 17.8 points higher than last year. The carrier’s pre-tax loss for the quarter was $256 million, compared with $1.8 billion last year.
Cargo revenues, a pandemic-era bright spot, fell 37 percent from last year to $398 million, as surface shipping and airfreight rates have fallen precipitously from last year.
Alaska Airlines Optimistic Despite January and February Stumbles
Seattle-based Alaska Airlines again exposed its first quarter difficulties. The carrier, which produced outstanding summertime profits last year, followed by modest profits in the fourth quarter, dipped into the red between January and March this year. Alaska reported a $79 million first quarter net loss excluding special items, along with a negative 5 percent operating margin. First quarters have indeed been difficult for the carrier historically. Its first quarter margin in 2019, however, was positive 3 percent.
All will be forgiven if Alaska proceeds to run up its profits this spring and summer, when Seattle’s highly seasonal tourism sector is in full bloom. Yet the company faces many new post-pandemic challenges, including a big increase in labor costs. Another concern is the recession currently afflicting the West Coast tech sector, resulting in mass layoffs at some of Alaska’s largest corporate customers like Amazon and Microsoft (both Seattle-based companies). Also last quarter, weather disruptions led to an unusually large number of cancellations.
Management says it will work to reduce the impact of its seasonal first quarter weakness, which is specifically concentrated in January and February; March by contrast was “was very profitable,” said CEO Ben Minicucci. “We almost hit a double-digit pretax margin.” Chief Revenue Officer Andrew Harrison underscored the point, noting that: “Throughout my tenure at Air Group, this airline has been solidly profitable 10 months of the year, with January and February always being the most difficult due to our network configuration and predominantly leisure consumer base.” United too made similar comments about business traffic coming in weaker than usual during January and February.
Dwelling too much on the first two months of the year, however, masks positive demand trends seen in March, which have continued into the spring. Even close-in bookings, often a proxy for business demand, have improved. Based on comments from management, Seattle appears to be the healthiest of Alaska’s big markets, with California still lagging.
In the meantime, the airline says productivity is improving, with employee absenteeism down and aircraft utilization benefitting from its move toward an all-Boeing mainline fleet. Alaska is also upgauging to larger planes with more seats and introducing new technology to improve operations, for one last week it said it would remove passenger kiosks from its airports. On the revenue side, management says it hopes to get 8-10 percent of its total revenues from alliance partners following its decision to join the Oneworld Alliance. This is enabling Alaska to participate in the longhaul international boom now underway. It’s getting help domestically, furthermore, from a close partnership with American Airlines.
With a strong balance sheet, a loyal customer following, and a long record of muscular margins, Alaska’s first-quarter losses hardly constitute a crisis. It would, however, like to achieve at least break even for the quarter.
UK’s EasyJet Post Winter Half Losses
EasyJet, the orange-colored LCC based in London, unveiled a negative 15 percent operating margin for the six months from October through March. That coincides with its offpeak winter season, in which losses are common. The losses this past winter, to its relief, were much milder than those from the previous winter, when Covid was still a menace. They were, however, substantially worse than they were in the winter half that ended in March 2020. Looking back, EasyJet’s record of profitability is respectable but underwhelming, especially compared to Ryanair. Then again, comparing anyone to the phenomenally profitable Ryanair is perhaps unfair. A typical full-year operating margin for EasyJet is in the upper single-digits. The good news is that demand this spring has been strong, not least during the important Easter holiday. Bookings for the crucial summer period continue to come in strongly as well. Operational integrity has improved a lot too, notwithstanding repeated air traffic controller strikes in France (Ryanair’s Michael O’Leary mockingly calls them “recreational strikes”). EasyJet and Ryanair have very different business models, with EasyJet’s characterized by business-friendly schedules from slot-constrained airports. It’s chasing European package tour travelers now too, hoping to hoover up business once held by Thomas Cook, which collapsed before the Covid crisis. EasyJet says its Holiday division is now “the fastest growing holidays company in the UK.” The airline is always optimizing its network, always on the lookout for new slots at key airports, always eager to boost ancillary revenues, and always relentless about cutting costs, albeit more tolerant of higher costs as a necessary corollary to operating at expensive airports. One thing that’s helped in recent months: Some weakening of what had been a super-strong U.S. dollar. Management, indeed, now expects earnings for its full fiscal year that ends in September to be ahead of earlier forecasts.
In Other News
- Ryanair’s Mr. O’Leary, besides mocking French unions, said more seriously that demand and pricing remain strong throughout Europe this spring and summer. He was speaking on Bloomberg Television, where he also said airport operational troubles were less of a problem for Ryanair because it flies to so many smaller less congested airports. It does not, for example, operate at London Heathrow or Paris Charles de Gaulle. It should thus be a good year financially for the Irish LCC. But O’Leary cautions: “Remember, this is the airline industry, and when things are going well, that means the next crisis is probably about four days away.”
- The BBC’s Business Daily podcast featured an episode about Africa’s troubled airline industry, asking why flights within the continent are so expensive. The answer, according to IATA officials and others interviewed, comes down to an underdeveloped airline industry held back by high taxes, poor connectivity, a lack of budget airlines, burdensome visa rules, restrictive air service treaties, and the absence of unified regulatory standards. The result is a landscape of weak and struggling airlines offering skeletal flight networks. Kamil Al-Awadhi, IATA’s regional vice president for Africa and the Middle East, tells the BBC that Africa today accounts for 18 percent of the world’s population but just 2 percent of its air traffic. The one exceptional case is Ethiopian Airlines, whose success was fostered by factors like limited government interference, efforts to develop internal talent, and pursuit of growth in markets like Asia and the Middle East.