United Airlines likes to make a scene.
Last week, the airline ordered 100 wide-body 787 jets from Boeing with another 100 variants and placed additional 737 MAX narrow-body variants, while placing a new order for more MAX jets.
The order was the largest widebody aircraft order ever placed by a United States airline, and will see the airline pursue its fleet renewal and expansion plans over the next decade.
United and Boeing teamed up to host a major event at the Dreamliner assembly plant in Charleston, South Carolina, to celebrate the order signing, featuring Boeing CEO Dave Calhoun, Boeing Commercial Airplanes CEO Stan Deal, most of United’s C. suite, including CEO Scott Kirby, and South Carolina Governor Henry McMaster.
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But beneath the dignified-laden mortar lies a high-stakes dynamic as United chart their strategy through the mid-2030s, a game with great potential but also high risks and costs.
Such events, and using a grandiose “historical” statement to outline the business plan, have become the United States’ standard MO, much to its advantage, as it has dominated aviation headlines in recent years.
Last year, for example, even as the airline was still struggling to claw its way back to profitability from the lows of the pandemic, United held a high-profile event at its Newark Liberty International Airport (EWR) hub to announce its “United Next.” plan, a roadmap to restructure its capabilities and fleet, which included an order for 270 narrow-body jets, the largest order ever by a US carrier.
This week’s event didn’t include a new cabin or product reveal, but it still saw the airline make a big media and marketing push, even leasing one of its own 737 MAX 8 planes to fly its army of crew members. from the airline’s various work groups using their personal social media accounts to promote the airline at the tacit direction of their employer, to Charleston sharing images and videos. Meanwhile, the assembly line in Charleston came to a brief halt as workers left their stations to don matching blue shirts and sat in a giant airplane hangar.
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While United’s CEO clearly likes being seen as an industry leader and relishes the headlines, as airline reporter Brian Summers wrote in a recent newsletter, Kirby will either be remembered as “one of the most famous American airline executives in modern memory” or “an all-time failure.” one … to spend billions on planes his airline didn’t need,” and Chief Communications Officer Josh Earnest’s team has an unmatched ability to capture the news cycle and online viral space, this time there was actually something there. .
If Summers’ first scenario comes to pass, it will be because Kirby steered the airline through the COVID-19 pandemic and the ensuing years of turmoil with an incredible degree of prudence.
When United imposed the narrow-body order, travel demand rebounded but was still far from recovering. United was still deep in the hole and had no obvious path to cash flow to support any short-term capital investments. The idea of retrofitting an existing fleet with a new interior seemed wild.
But 18 months later, the move looks like a good one.
Runway and other infrastructure constraints at major airports, and which are effective constraints on its Newark hub slots, limit the number of airline flights. Part of United’s strategy is to “upgrade” planes on much smaller routes to combine frequencies — in other words, for example, flying a 100-seat plane twice a day instead of operating a 50-seat plane four times a day. plane, saving two take-off and landing slots.
Meanwhile, ongoing supply chain constraints in the global economy look set to continue for some time to come. With order availability and delivery locations secured, United has some relative certainty for its new planes, assuming Boeing can stabilize its production rate. It also locks in pricing terms during periods of high inflation.
United believes the supply chain issues will be resolved in the long run. The project to refurbish its cabin interiors is moving slower than expected but is still expected to be mostly finished by the middle of this decade, Kirby told reporters Tuesday at a deal-signing event at Boeing’s Charleston plant.
“Not much has been done so far,” Kirby said. “It’s on track, if not 100% complete by 2025, then substantially complete by 2025.”
“There was a certain supply chain [issues]but we mostly brought the wrestlers to the ground.”
Notably, it was the first time United had suggested the project could slip beyond 2025.
It’s too early to tell if the order will be the right call in the long run, and it’s too early to see how the wide body order will hold up.
But on the face of it, it seems like a smart move.
Demand for international travel has recovered, Kirby said, and there is no reason to expect it to decline. Long-haul also gives United an opportunity for growth that it can’t quite replicate domestically. The airline’s executives often point to their 2020 decision not to shed its sprawling fleet as allowing it to take advantage of rebounding demand in the next two years and return to a global route-building initiative.
“It’s really the next logical step in the path that United has been on since the beginning of the pandemic,” Kirby told reporters at an event in Charleston this week. “United has disappeared on the other side of the epidemic in a completely unique way.”
Kirby also said that the airline decided to place such a large order in an attempt to take advantage of the opportunities created by the pandemic, after all, before the pandemic, an order of just 50 wide-body aircraft would have been considered a big deal.
“The reason we went big is because we’re big,” Kirby told reporters, “and we’re uniquely positioned for international growth in our centers, and I think international is going to be really strong for years to come.”
“The structural changes that have occurred during COVID mean it will be a long time before most of our competitors can return to growth, even back to where they were in 2019,” Kirby added. “We’re starting over, and we’re going to run even harder.”
United has grown ambitious since international borders began to reopen following the 2020 lockdown, trying new and surprising destinations such as Ghana, Jordan and Malaga, Spain.
Notably, the 787s average about 25% better fuel efficiency per seat than United’s current international fleet, providing an added incentive to replace older aircraft.
Still, planes are expensive, and United’s commitment to 100 new widebodies is big.
At list price, the order would be worth about $30 billion, depending on how many of each option United settles for. Although airlines never pay full price for new planes, and United got favorable terms; “I’m smiling, that’s all I’ll say about the price,” Kirby laughed in response to a reporter’s question in Charleston, though it’s a lot of money. for a company that already has hundreds of aircraft on order. United ended the third quarter of this year reporting a profit of $942 million on revenue of $12.9 billion and liquid assets of $20.4 billion.
Still, speaking at an event in Charleston on Tuesday, Chief Financial Officer Jerry Laderman said the airline doesn’t anticipate problems.
“The airplanes you build are profitable vehicles,” he said. “We’re going to make so much money with these planes that the more the merrier as far as I’m concerned.”
At a briefing on Monday, Laderman said the airline expects to pay for the plane from its own revenues, but said it may choose to finance some “to the extent that we find capital market financing attractive.”
“We have the luxury of making that choice,” he added.
What will ultimately make or break United is demand. If Kirby and the airline are correct and international demand remains strong, the airline will approach the 2030s with at least today’s fleet size; with 100 additional aircraft that the United States could purchase if there was an “opportunity” to expand to a new one. routes or markets emerge, Laderman said during a pretrial briefing on Monday.
But if travel demand shrinks or starts to look different, perhaps with a renewed trend toward larger planes or a focus on international travel, or if a plan to increase routes and reduce frequencies ends up backfiring, United can’t find out. what to do and how to pay for 700 incoming plane.