Issue No. 895
United Confronts New Realities
CEO Scott Kirby Charts Its Post-Pandemic Course

Pushing Back: Inside the Issue
Polite. Complimentary. Respectful. Nobody would use these adjectives to describe Scott Kirby’s attitude toward low-cost airlines. The United Airlines chief showed up for the company’s fourth quarter earnings call with a baseball bat, swinging at rivals for sins ranging from underinvestment in technology to ignoring new post-Covid cost and supply conditions. Kirby’s thesis: The current state of U.S. aviation infrastructure and labor markets means that airlines can’t produce capacity at nearly the same cost as they could prior to Covid. Ultra-LCCs, specifically, are foolish to think they can maintain their pre-crisis business models of achieving cost efficiencies by growing at a double-digit clip. Pilot availability won’t allow it. FAA capacity won’t allow it. Aircraft production rates won’t allow it. Or so Kirby asserts.
One thing he won’t assert so openly — but which he’s clearly inferring — is that airfares will inevitably rise. Or put another way, flying will become increasingly expensive. That's only natural as demand, according to United, continues to grow significantly in the years ahead. But airlines will be unable to accommodate all of it; this was on vivid display in 2022, when United and the rest of the industry wanted to fly more but simply could not. Not enough pilots. Not enough planes. Not enough air traffic controllers. All of this makes clear why United is so bullish on large-gauge narrowbodies, providing more seats without the need for additional pilots, additional departures, or additional utilization. Kirby, for the record, has been bullish on large-gauge narrowbodies since his A321-loving days at US Airways. He’s now bullish on international routes as well, viewing United as well-positioned to prosper intercontinentally thanks to a more benign competitive landscape post-Covid. And hence Kirby's bullish bet on more 787s.
Ryanair, like United, is upgauging with larger Boeing 737 Max jets. Also like United, Ryanair has a chief executive that’s not best described as polite, complimentary, and respectful. In Michael O’Leary’s case, perhaps the words obnoxious and profane are more fitting. But there’s no disputing his brilliance, presiding over what’s arguably the world’s most successful airline ever, Southwest perhaps dissenting. Ryanair is once again expecting strong results this spring and summer, pointing to exceptionally strong bookings. (This is more than ten years old but eternally entertaining).
Ryanair separately announced some new summer routes from the UK. So did EasyJet, Wizz Air, and Lufthansa’s Eurowings. Speaking of Lufthansa, it still covets Alitalia’s successor ITA, submitting an offer to acquire a stake — at first a minority stake but with options to take full control in the future. For Air France-KLM, Alitalia was long an airline it couldn’t live with but couldn’t live without; the Italian carrier provided rich traffic feed from northern Italian business centers but also a perpetual stream of red ink, 25 percent of which once flowed to Air France-KLM. The Lufthansa Group, surely with some uneasiness, is betting that ITA will provide more upside than bad. Lufthansa said, by the way, that after the U.S., Italy is its largest foreign market.
The earnings intensity amplifies this week, with a slew of carriers set to report. Southwest is the headliner, making its first appearance before investors since its monumental operational nightmare — an unprecedented nightmare that could cost it a billion dollars. Imagine what would stream from Michael O’Leary's mouth if Ryanair lost that kind of money.
Airline Weekly Lounge Podcast
Was that a hint of an Irish accent when United Airlines CEO Scott Kirby took down the U.S. industry for being unprepared for the post-Covid operating reality? Plus, the U.S-China air service recovery is in the hands of government officials. Listen to this week’s episode to find out. A full archive of the Lounge is here.
Weekly Skies
“This is the biggest growth opportunity I have seen for the last 20 years,” Ryanair CEO Michael O’Leary said last week. The airline surpassed 2019 traffic levels in 2022 and predicts robust growth this year as it rapidly pulls out of the devastating Covid years.
Ryanair is capitalizing on its low-cost base to defeat any rival in a price war, the arrival of up to 45 new Boeing 737-8200s by the end of May to boost capacity, and the slow pace of capacity restoration, especially at Europe’s network carriers, O’Leary said. However, the longtime airline executive, who was unveiling the addition of six new routes from London’s Stansted Airport at a press event in the UK capital, has been around long enough not to take anything for granted.
“Every time you see a very large growth opportunity in Europe, some curveball gets sent to you whether it’s Covid, Ukraine, or something else. Shit always happens in this industry,” he said.
The pandemic, however, could be the crisis that finally delivers fundamental change to the airline market in Europe. “I think Covid has seen and will be seen to have delivered a huge inflection point in European aviation,” O’Leary said. “Prior to Covid there was lots of new entries, new airlines, and low fare carriers etc. Covid has dramatically accelerated the consolidation process in Europe.”
O’Leary envisages an amalgamated European airline industry with four main players in a structure that mirrors the U.S.
Today, there are six large carriers in Europe: Air France-KLM, EasyJet, International Airlines Group (IAG), Lufthansa Group, Ryanair, and Wizz Air. O’Leary believes “Alitalia” – which is what he calls its reincarnation ITA Airways – will be taken over by Lufthansa in the coming 3-4 months; TAP Air Portugal finishing in IAG’s hands; EasyJet being bought by IAG or Air France-KLM, or “both jointly,” and then “Lufthansa will buy Wizz.”
Only Ryanair will remain as an independent low-cost carrier if this scenario plays out. “We are morphing into a marketplace where there’s going to be four very large carriers not unlike North America, where there’s three large connecting carriers – Delta, United, American – and Southwest, which is the large but not so low-cost airline anymore,” said O’Leary.
Time will tell if Covid speeds Europe towards a structure where there are four majors as O’Leary spies in his crystal ball. For now, the Irishman is intent on executing Ryanair’s ambitious growth plan over the coming 3-4 years. There are risks of course, as he lists the well-known ones: Ukraine, Covid, inflation, and recession.
Fuel costs at Ryanair are rising too, with it facing “about a 30 percent increase in our oil bill this year,” said O’Leary. “But there’s a realistic prospect of very strong passenger volumes through this summer, and rising airfares.”
Ryanair aims to carry 168 million passengers in its 2023 fiscal year, which ends on March 31. That is well above its pre-Covid high of 149 million in 2020, and forecast to continue rising to 185 million in 2024, and reaching 225 million by 2026.
At the turn of the year Ryanair’s management team was unsure how bookings would trend as 2023 began, but “people do seem at least at this point to be booking both their Easter and summer travel,” said O’Leary.
Demand has in fact reached record levels, with the carrier taking over 2 million bookings for the first time in a single weekend, January 14-15, he said. The previous weekend record was in early 2019 at 1.6 million bookings when there was a seat sale.
For O’Leary, the strong booking story is significant as it was not boosted by a seat sale, and leads him to believe that “we’re looking at fares rising high single digits for a second year” driven by demand as well as partly being influenced by high oil prices. The airline’s average fare will rise from €50 ($54) in 2022 to €53-55 this year, he said.
Reflecting this optimistic picture, on January 4 Ryanair lifted its full-year net profit guidance to a range of €1.33-1.43 billion before exceptional items, up from between the guidance of €1-1.2 billion issued in November.
“If we had a year of strong demand, slightly higher fares, if oil prices stay stable or fall, and we have no adverse developments in Ukraine we make a bundle of money this year but if any of those things goes wrong, we will be as usual trying to put out fires left, right and centre,” said O’Leary.
As Ryanair boosts its UK capacity this summer by 10 percent, one of its fastest growing markets is Italy, mainly due to “Alitalia’s” capacity pullback, with Portugal, Spain, Poland, and Romania the other “big growth markets in Europe.”
In Italy, Wizz Air is cutting back in the face of competitive pressure from Ryanair, said O’Leary. He points to Wizz closing several domestic routes and cutting frequency on others in recent days in addition to closing bases in Bari and Palermo. “They are in retreat out of Italy,” he claimed.
“I think Wizz have very cleverly realised, well it’s taken them about five years, that they can’t compete with Ryanair,” said O’Leary. “If you go head-to-head with Ryanair, they lose because we have lower costs. We have lower fares, and generally a much bigger market footprint in a market that easily we’re up to 40 percent market share.”
“And I think what they’ve said is where can we find a market where we don’t have to compete with Ryanair, and that is the Middle East and I think it’s a sensible development from Wizz’s point of view,” he added. Wizz Air has expanded in Abu Dhabi and Saudi Arabia in recent years.
“Wherever they keep retreating and pulling capacity, we keep adding aircraft and adding capacity and the real barrier to entry I think for airlines in Europe nowadays is Ryanair,” said O’Leary.
“We are the biggest airline in most European markets with by far the lowest costs and the lowest fares. The challenge [for rivals] is can you enter a market where you’re able to compete with us on price and the answer is probably no but that means we have to keep going,” said O’Leary. “We have to keep growing and keep the prices down because that’s the only way we can make it difficult for competitors. And we want to make it very difficult for competitors.”
— Mark Pilling
In Other News
- Cathay Pacific‘s expected loss in 2022 is deeper than many analysts expected. Last week, the airline released guidance of a HK$6.4-7 billion ($817-$894 million) net loss, which Bloomberg reported is more than double analyst expectations of a HK$3.4 billion loss. Still, the airline stands to benefit significantly this year from Hong Kong’s decision to end travel restrictions in December, with China ending their restrictions earlier this month. Cathay is a major connecting airline into China; in 2019, 30 percent of its global seats touched the mainland.
- Pilot unions at Delta, Hawaiian, and Southwest all took actions toward new contracts last week. The Air Line Pilots Association (ALPA) master executive committee at Delta moved its tentative agreement with the airline forward to a ratification vote. Pilots will vote from January 31 through March 1. ALPA and Hawaiian reached a tentative agreement with an average 32.9 percent pay jump. Pilots will vote on the accord for two weeks beginning January 27. And at the Southwest Airlines Pilots Association (SWAPA), President Captain Casey Murray called for a strike authorization vote that would begin on May 1. The move is more symbolic than a real threat of a strike, and seen by many as a negotiating tactic in the union’s protracted talks with Southwest management.
- Air Serbia said it returned to profitability in 2022, earning a net €21 million ($23 million). It emphasized that it did so “without a single euro coming from government subsidies.” Like most airlines, Air Serbia saw a strong jump in traffic last spring, when countries around Europe removed travel restrictions, and when the omicron wave of the pandemic subsidized. CEO Jiri Marek said he’s “immensely happy with the good financial result achieved last year … this is the real indicator of our company’s ability to react quickly and recognize opportunities for recovery and growth.” The result, he added, “comes after two extremely difficult years, not only for our company, but for the entire commercial aviation sector globally.” Air Serbia launched in its current form ten years ago, born from the remnants of Jat Airways. The carrier gained critical backing from Etihad Airways, which until recently owned 49 percent of Air Serbia’s shares — the rest was owned by Serbia’s government. After the pandemic, Etihad reduced its stake to 18 percent, where it currently stands.
- Consolidation in Europe and South America took a step forward last week. The Lufthansa Group officially submitted a bid to Italian officials for an initial 40 percent stake in ITA Airways. If accepted, Lufthansa and Italy still need to negotiate the final terms of a deal. Lufthansa’s offer includes the option to take full control of ITA in the future. And in South America, Colombia’s civil aviation authority, Aerocivil, resumed its review of the proposed Avianca–Viva Air merger after finding a “substantial irregularity” in its initial rejection of the deal. No word on when a decision could come down, but Aerocivil said it would proceed “quickly” with its review.
- Trade group Airlines for America (A4A) wants the Department of Transportation to extend slot waivers for U.S. airline flights to China and Tokyo Haneda through the end of October. The waivers, which have been in place since the start of the pandemic, allow carriers to temporarily suspend flights without running afoul of rules that require them to return these government-allocated authorities if they do not use them in a given 90-day period. U.S. airlines “do not foresee significant and certain international passenger growth in either China or Japan before expiration of the [slot waivers] on March 26, 2023 leading into the summer season.” China reopened to international visitors on January 8, and Japan dropped its border restrictions late last year.
Fleet
- Bankrupt SAS has achieved its goal of roughly 1 billion Swedish kroner ($97 million) in annual aircraft lease savings. The airline recently reached amended terms on 13 aircraft with Air Lease Corp. and Jackson Square Aviation, which completed its negotiations with lessors. In total, SAS has amended terms on 59 leased aircraft in its fleet. The airline aims to exit its U.S. Chapter 11 restructuring in the second half of the year.
- Spirit Airlines has outlined how it will exit its Airbus A319 fleet by the middle of the decade. Last week, the carrier sold 29 aircraft to Gryphon Aviation Leasing for up to $201 million. The A319s will come out of its fleet and be delivered to the lessor this year and next. The two remaining A319s in Spirit’s fleet are leased and will be returned to their owners in 2025.
- Delta exercised 12 options for the Airbus A220-300 last week. Coupled with its in-service fleet of A220s and firm orders, the latest deal will bring its total number of the type to 119 aircraft. The latest orderbook additions will arrive in 2026 and 2027.
- Speaking of the A220, ALC placed six planes (four -300s and two -200s) with Croatia Airlines. The placement is part of the carrier’s plan to renew its 13-aircraft strong fleet with A220s. Croatia ordered six A220-300s directly from Airbus in November.
- On the topic of orders, Airbus picked up a firm commitment for 12 Airbus A320neos from Uzbekistan Airways last week. And Embraer recorded a commitment for 15 E195-E2 aircraft from an undisclosed customer.
Routes and Networks
- It was new UK route week last week. EasyJet, Ryanair, and Wizz Air unveiled a slew of new summer offerings connecting the country to points in Europe. EasyJet will add 11 new routes from nine UK gateways, including Birmingham, Edinburgh, Glasgow, London Gatwick, and Manchester. Destinations include Ancona and Naples in Italy; Antalya and Izmir in Turkey; Calvi and Paris Orly in France; and Lisbon. Ryanair will add four new routes from London Stansted: to Asturias, Spain; Klagenfurt, Austria; Leipzig, Germany; and Newquay in the UK. All in, Ryanair will offer 10 percent more flights from Stansted — its main London base — this summer than last. And not to be left out, Wizz will connect both London Gatwick and Luton to Istanbul, plus the former to Antalya and Dalaman nonstop. Flights begin in late March, except the Dalaman route that begins May 23.
- Not to be left out, Lufthansa Group discounter Eurowings unveiled its own robust summer schedule last week, including plans to fully recover the number of flights to 2019 levels. The airline will add 14 new routes in addition to those previously announced. The new markets include: Berlin to Graz, Ibiza, Nice, Porto, and Zakynthos; Prague to Corfu, Geneva, and Rhodes; Stockholm to Rome Fiumicino and Stuttgart; and Eurowings’ Cologne, Dusseldorf, and Hamburg bases also gain a route or two. Asked about the additions, a Eurowings spokesperson said advance holiday bookings are near pre-pandemic levels, prompting the decision for such a robust, leisure-focused summer schedule.
- Ethiopian Airlines made good on its promise to add Atlanta to its network. The Star Alliance carrier will connect Addis Ababa with the city four-times weekly from May 16. Eastbound flights will stop in Dublin, while westbound flights will make the 7,703 mile journey nonstop. Ethiopian CEO Mesfin Tasew Bekele said in September that the airline wanted to provide “more connectivity with the United States [and] Africa.” Resuming flights to Houston Bush, which were suspended in May 2020, is also on the horizon.
- Delta confirmed previously reported plans to add Auckland to its map later this year. Daily flights from Los Angeles on an Airbus A350-900 will begin on October 28. The addition marks the first time in Delta’s history that it has served New Zealand; as well as the first time that all three global U.S. airlines have flown to the country. American serves Auckland from Dallas-Fort Worth, and United from San Francisco. Delta will also add a new daily nonstop between Atlanta and Nice with a Boeing 767 from May 12.
- Route tidbits: Air France will add a new weekly nonstop between Cayenne in French Guiana and Belem, Brazil, on an Airbus A320 from May 5. Alaska Airlines is pulling back at Dallas Love Field to just two daily flights: One each to San Francisco and Seattle-Tacoma. Gone are the carrier’s pre-pandemic nonstops to Los Angeles, Portland, Ore., San Diego, and San Jose. Finnair is adding two new routes this summer from its Helsinki base to Bodo, Norway, and Milan Linate. Etihad will land in Copenhagen for the first time on October 1, offering four weekly flights from its Abu Dhabi base on a Boeing 787. Breeze Airways is adding another transcon from Richmond, Va., connecting the city to Los Angeles thrice-weekly with an Airbus A220 from May 18.
Feature Story
Remember United’s old advertising slogan: Fly the Friendly Skies? In 2023, the airline has a different message for investors: Beware of the crowded skies.
During United’s fourth quarter earnings call, CEO Scott Kirby warned over and over again that America’s aviation system “simply can’t handle the volume today, much less the anticipated growth.” And that’s unlikely to change anytime soon. United itself, Kirby said, needs 10 percent more pilots and 5 percent more aircraft to produce the same amount of seat miles it was flying pre-pandemic. That’s because of bottlenecks in the system, including pilot shortages, staffing shortages at airports and the FAA, higher rates of workers calling out sick, delays in aircraft production, and so on. Kirby thinks the situation is even worse for most of United’s rivals, including Southwest, which he suggested were “out over their skis and [have] simply outgrown their technology, infrastructure, and resources.”
United, he insisted, has some of the most congested and toughest-weather hubs, and its superior operational performance this winter stems from smart decisions during the pandemic, including the retention of more pilots and planes. Coming into this winter, he added, “we had a huge head start compared to most airlines because we started with much better technology and infrastructure.” Kirby also said United “flew a lot less last year than we’d have liked to fly, but we did it intentionally because it gave us the breathing room to make even further investments in our technology and infrastructure and to increase our staffing levels.” His larger point: “You can’t run your airline like it’s 2019 or you will fail.”
Running an airline with more spare capacity and people sounds costly. Well, it is. Yet United isn’t pessimistic about future earnings. On the contrary, he’s optimistic that the entire U.S. airline industry will be more profitable going forward as limits on supply, along with ongoing demand growth, lead to higher revenues. Sure enough, United achieved excellent fourth quarter results, including a $1.4 billion operating profit excluding special items on $12.4 billion in revenues — the math on that translates to an 11 percent operating margin. United’s fourth quarter figures were in fact strikingly similar to Delta’s — Delta too earned a $1.4 billion operating profit, on only slightly less revenue, producing an operating margin a few tenths of a point higher (rounding to 12 percent). Both carriers were 9 percent smaller in ASM terms than they were in the same quarter four years earlier. But a few notable distinctions with Delta: United paid 34 cents more per gallon for fuel (Delta, remember, has an oil refinery). United’s operating margin, meanwhile, was two points better than what it achieved in the fourth quarter of 2019 (Delta’s was a point worse).
Along with supply constraints as far as the eye can see, Kirby also envisions a new reality in which ultra-low-cost carriers can no longer maintain their labor cost advantage — not with pilot supply so tight. While stopping short of calling the ULCCs a “Ponzi scheme” as he did last year, Kirby showed a chart in which Frontier and Spirit top the list of flight cancellations during early January, despite relatively calm weather. That seems to suggest problems with pilot availability. United, meanwhile, is licking its chops following Southwest’s operational meltdown, hoping to lure some of its customers. Many of the places where Southwest is largest, including Denver, Chicago, the Washington, D.C., area, California, and Houston, also happen to be major United markets.
How does United itself plan to grow in an age of labor, aircraft, and infrastructure shortages? Earlier decisions to keep more workers and planes will help. More strategically, United is aggressively shifting to larger planes, ridding its system of many regional jets and mass ordering large versions of Boeing’s 737 Max. It’s at the same time ultra-bullish on intercontinental markets, where rivals downsized greatly during the Covid crisis. To that end, it’s binge buying Boeing 787s, expecting incidentally that these orders will create an undersupply of such jets for rivals, given Boeing’s extended backlogs. Other airlines, in other words, will have to wait in line behind United. Or so it hopes.
International markets are certainly doing well at the moment. One might characterize them as scorching hot. Having kept all of its widebodies during the crisis, United’s European network is now 10 percent larger than it was in 2019. Even so, transatlantic unit revenues last quarter were 11 percent greater than they were four years earlier. Total transatlantic revenues, remarkably, were 22 percent higher, another testament to the industry’s current pricing power. It’s evident elsewhere in the network as well, including Latin America — shorthaul Latin is incredibly strong — and certain Asia-Pacific markets, like Korea and Australia. U.S. travel to Japan, a big market for United, is resurgent. Outbound Japanese demand, however, has been slower to recover. China, meanwhile, is just now reopening, subject to government approvals for restoring capacity. But make no mistake, pent-up demand to visit China, especially among those with family there, is substantial. Russia’s closed airspace, by the way, remains an issue for flights to Asia, including India.
Looking ahead, United will start flying to Dubai from Newark in March, following recently launched flights to Cape Town from Washington. It has a new partnership with Virgin Australia and — more significantly — a new pending transborder joint venture with Air Canada. In 2022, 80 percent of United’s domestic departures were operated on a dual-cabin aircraft, up from 67 percent in 2019. Newark and Denver airports are adding gate capacity. Executives did note some softness in demand during the opening weeks of January but quickly dismissed it as an aberration, with bookings for the rest of the quarter looking strong. Polaris, its longhaul business class product, is still lagging 2019 levels of demand but should recover as corporate demand improves. One open question for United though: When will it secure a new pilot contract and how much will it cost?
In any case, United expects to prosper in the years ahead despite a higher cost base and despite an increasingly crowded sky. In fact, it expects to prosper in part because of higher costs and more congestion — because LCCs will find the cost increase tougher to swallow, and because congestion and supply-side constraints will suppress capacity beneath what demand suggests it should be. Some of United’s rivals, Kirby asserts, say they plan to grow aggressively. But their aspirations are “simply unachievable.”
By the Numbers
- Newark now United‘s largest hub, boosted by aggressive transatlantic growth.
- California hubs in Los Angeles and San Francisco are struggling to regain their pre-pandemic clout given tech recession and Asia’s delayed reopening.
