Uh-oh, United: Suddenly, things are looking considerably worse for America’s third-largest airline
It was all doom and gloom as United CFO Andrew Levy addressed a Cowen Transportation conference last week. Doom and gloom? In the super-profitable U.S. airline industry?
Indeed, United revised its Q3 earnings forecast significantly downward. It no longer expects pretax margin excluding special items to be between 13% and 15%, as it expected in July. Now the figure looks likely to be between 8% and 10%. That’s potentially just half the 16% pretax figure it earned in last year’s Q3. Something’s obviously going badly wrong. But what?
Hurricane Harvey, of course, was a big blow to United, which counts Houston as its second largest hub after Chicago—premerger Continental, don’t forget, was headquartered there. The storm, which left the city and its airports largely under water, caused the largest operational disruption in United’s history, resulting in four days of suspended service and more than 7,400 flight cancellations— hurricane Ike in 2008, by contrast, previously the most disruptive storm ever at the Houston hub, caused about 3,400 cancellations at Continental. The lost revenue from Harvey will likely have lowered the airline’s Q3 passenger RASM by 1.5 points. The impact could bleed into Q4 too, with local Houston demand still not fully recovered. Connecting traffic, on the other hand, which accounts for more than half of United’s Houston traffic, should be unaffected going forward.
And Harvey was only one of several setbacks for United this quarter. By all appearances, its rollout of basic economy fares proved a costly misstep as it quickly moved to a nationwide rollout that left it with a severe first-mover disadvantage— versus American, most importantly. United took a more aggressive approach than its Big Three rivals, offering a basic economy option for every seat it sold, hoping to discourage all but the most price sensitive passengers from choosing it by imposing draconian conditions, such as no free carry-on bags if they required overhead bin space, no advance seat assignments and so forth. The idea: provide fares equal to those offered by ultra-LCCs, but only to those passengers willing to put up with Spirit-like inconveniences and fees.
Spirit, in particular, has proved a menace to United, building…
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