I’ve written about how air travel demand is softening after the busy summer travel rush, though these changes in demand seem to be disproportionately impacting ultra low cost carriers.
Why is that? Well, the positive performance among airlines lately has been heavily focused on long haul travel, strong demand for premium products, and lucrative credit card agreements, and those are areas where the ultra low cost carriers can’t really compete.
We’ve heard Frontier Airlines CEO Barry Biffle suggest that “you’ve got fuel, capacity and demand all headed in the wrong direction,” and that this means that ultra low cost carriers are “kind of the canary in the coal mine.” United Airlines CEO Scott Kirby has now also issued a pretty grim prediction…
In this post:
Scott Kirby expects big changes at low cost carriers
United reported its third quarter financial results today, which were pretty good thanks to strong transatlantic and transpacific performance. Kirby published a post about the company’s third quarter financial results on his personal LinkedIn today, and interestingly it says very little about United, but rather talks about competitors. Here’s what Kirby had to say:
The third quarter was another confirmation that United Next is working exactly as we expected, both for United and for the industry at large. It’s pretty remarkable that this quarter, ~98% of the total expected industry revenue growth will come from United and one other airline, and ~90% of the total expected industry pre-tax profit will come from just those two airlines.
For my entire 30-year career, the airline industry has gone through cycles, and we are in one now…but all of those cycles have ended with the lowest margin airlines forced to make adjustments — which will lead to better results for United. The adjustments are an inevitable economic reality, and I expect it to happen again by 2H24. What’s different this time around, however, is that the lowest margin airlines are the so-called low-cost carriers, and that’s where I think the changes are going to occur. As a result, United is going to emerge in a structurally stronger and sustainable position. The changes ahead are significant are are going to lead to a much better outlook for United’s customers, employees and shareholders.
In case it’s not obvious, Kirby is referencing Delta as being the other airline with impressive revenue growth and pre-tax profit (reflective of American’s underwhelming financial performance).
My take on Kirby’s low cost carrier comments
I think Kirby is more or less right about the situation that ultra low cost carriers are in. Frontier’s own CEO acknowledges the challenges that the airline is facing, so this isn’t just one CEO slinging mud at a competitor.
Between higher labor costs, domestic supply increasing faster than demand, leisure demand so heavily being focused on long haul flying, consumers desiring premium seats, inflation hitting the most price sensitive consumers, and the lucrative credit card agreements that legacy airlines have, ultra low cost carriers aren’t in a great situation.
What could structural changes look like for ultra low cost carriers? It’s probably not practical or advisable for ultra low cost carriers to get into long haul flying on a widespread basis, but:
- I think we might need to see ultra low cost carriers diversify their product offerings, with more premium seats and offerings; cramming seats into planes is only an advantage if you can actually fill all of those seats
- I think we might need to see more industry consolidation, as the US probably doesn’t need as many ultra low cost carriers as it currently has
- JetBlue is trying to acquire Spirit, and ironically I think this would actually contribute to the structural evolution that Kirby is talking about, yet the Department of Justice is trying to block that takeover
While I agree with Kirby’s comments about ultra low cost carriers, personally I think he’s overplaying United’s position quite a bit, or perhaps just the overall position of legacy airlines:
- United has seen a huge increase in labor costs, and when premium demand is robust that’s fine, but if there’s a significant decrease in demand, United is going to be in a very rough position
- United is by far the most global of the “big three” carriers, and that’s a good position when long haul demand is strong, but if we see a downturn in international demand (which will without a doubt happen at some point), United will be in the toughest position
- Given the number of long haul flights that United operates, the airline is most exposed to increased fuel costs in terms of the economics of routes working
- Not to simplify things too much, but broadly I think the current strength of the legacy airlines reflects that the stock market is strong, while a lot of middle class consumers have been hit hard by inflation, and don’t have much disposable income
- If we see an economic downturn that also impacts those in society who are better off, I imagine the demand for premium travel will decrease significantly, credit card spending will be down, etc., and that’s going to be a tough reality with the current cost structures these airlines have
Bottom line
United Airlines CEO Scott Kirby is suggesting that we’re going to see some major structural changes to ultra low cost carriers in the United States, as he argues they’re currently the weakest airlines. While it’s an odd focus for United’s CEO to have as the company reports its own financial results, this is a sentiment that’s even echoed by Frontier Airlines CEO Barry Biffle.
So it’s going to be interesting to see how ultra low cost carriers evolve to adapt to the current realities of the industry. It seems like there’s space for ultra low cost carriers to innovate and introduce more premium products (in line with consumer desires), but that’s also something that’s currently being blocked by the Department of Justice, with the JetBlue and Spirit merger…
What do you make of Kirby’s claims about ultra low cost carriers? Do you think he’s overplaying United’s current position?
"I think we might need to see more industry consolidation, as the US probably doesn’t need as many ultra low cost carriers as it currently has."
Frontier is the last major "low cost carrier" in the states.
Southwest has got BIG PLANS! We're GOOD! #LUV #Southwest
Global war is coming and the airlines are just one industry that will be dismantled. All of them.
The airline industry is always feast and famine..has been since the first airline ticket was issued.
Transatlantic service is the first to sneeze when the economy goes south (remember Pan Am in '73 & '80). Asian flights are next in line (just ask Hawaiian).
Kirby is bragging because UA is in a sweet spot in the current economic environment. Once things go south, a mad scramble will ensue redeploying airframes, crews, and support.
The airline industry is always feast and famine..has been since the first airline ticket was issued.
Transatlantic service is the first to sneeze when the economy goes south (remember Pan Am in '73 & '80). Asian flights are next in line (just ask Hawaiian).
Kirby is bragging because UA is in a sweet spot in the current economic environment. Once things go south, a mad scramble will ensue redeploying airframes, crews, and support.
Right now, the big 4 (I include WN) are sucking like crazy on credit card points and FF miles for revenue growth. However, it will hit the fan should the government get involved due to abuse or as a possible revenue tax source. Uncle Sam needs cash in the current crisis environment.
The only positive thing that came out of COVID is the airlines rationalized their fleets. Yet, today, they are on a buying binge like kids in a candy store.
As Bob Crandall of AA once said, the airlines are a great place to work, but god awful place to invest your money.
Concerning your thoughts, the one thing I might not agree with is:
"Given the number of long haul flights that United operates, the airline is most exposed to increased fuel costs in terms of the economics of routes working"
Here is an interesting article
https://www.aviationfile.com/what-stage-of-a-flight-consumes-the-most-fuel/#:~:text=If%20we%20look%20at%20the,the%20longest%20time%20and%20distance.
While long haul flights do consume more fuel, the stages of flight which consume the most fuel are taxi, take-off, climb out and then taxiing to the gate upon...
Concerning your thoughts, the one thing I might not agree with is:
"Given the number of long haul flights that United operates, the airline is most exposed to increased fuel costs in terms of the economics of routes working"
Here is an interesting article
https://www.aviationfile.com/what-stage-of-a-flight-consumes-the-most-fuel/#:~:text=If%20we%20look%20at%20the,the%20longest%20time%20and%20distance.
While long haul flights do consume more fuel, the stages of flight which consume the most fuel are taxi, take-off, climb out and then taxiing to the gate upon landing.
Presumably long haul fares are generally higher than short hauls, especially if a carrier has large premium cabins like United.
Therefore, I would surmise that short haul flights are actually hurt more by rising fuel costs, than long hauls....
How is the majority of industry revenue growth coming from only UA and DL? AA hasn’t reported yet, but wouldn’t the growth come from all three of them since they have the same business models?
When you have parts of the industry that are in negative growth, you can end up with facts like that. To simplify, imagine that DL posts 5 burglefickles of revenue growth, UA 4, AA 3, and everyone else nets -2 burglefickles. The industry net growth is then 10 burglefickles, of which DL and UA combine for 90%, DL and AA are 80%, AA and UA are 70%, and the three legacies combine for 120% of...
When you have parts of the industry that are in negative growth, you can end up with facts like that. To simplify, imagine that DL posts 5 burglefickles of revenue growth, UA 4, AA 3, and everyone else nets -2 burglefickles. The industry net growth is then 10 burglefickles, of which DL and UA combine for 90%, DL and AA are 80%, AA and UA are 70%, and the three legacies combine for 120% of the revenue growth.
It's reasonable to expect that AA will not see the UA/DL level of growth: their network is somewhat more domestic and short international leisure (closer in some sense to Spirit than either of the other legacies are).
American has already guided investors to having weak earnings. Analysts asked AA execs on their last earnings call 3 months ago for the reason and the company really didn't really give good reasons but the overriding belief is that the end of the Northeast Alliance and the disruption to the network is the primary reason. I expect AA will improve relative to the industry in the winter but we will know not only how well...
American has already guided investors to having weak earnings. Analysts asked AA execs on their last earnings call 3 months ago for the reason and the company really didn't really give good reasons but the overriding belief is that the end of the Northeast Alliance and the disruption to the network is the primary reason. I expect AA will improve relative to the industry in the winter but we will know not only how well AA did in the 3rd quarter but how they expect to perform in the 4th quarter - last 3 months of the year
Tim, out of curiosity, do the airlines report individual hub performance? I think that would be telling, as well.
no, they do not.
You can pull average fare performance by route but international data is excluded unless you go through all kinds of Ft. Knox-type clearances.
Hub metrics for the big 3 are meaningless w/o international fare data.
All my frontier flights have been good experiences, but then I love the dollar store. I can live without a friken Disney movie or being 'served' for 3 hours.. I don't understand how they can do it but sometimes I buy a snack or pay for a "select" seat just in hope they make a little money (lol 20 bucks). I'd be fine if they jacked up the prices enough to stay in the game..
How different ULCC landscape in the US is compared to Europe's. The likes of FR and W6 don't stop growing and taking market share from the legacies. Recently, I red an insider saying that ULCC market share in P2P traffic in Europe was more than 80%, not to mention FR carrying more pax than LH or BA.
Looks like US3 strategy of building loyalty through credit cards, ability to transfer points/miles here and there...
How different ULCC landscape in the US is compared to Europe's. The likes of FR and W6 don't stop growing and taking market share from the legacies. Recently, I red an insider saying that ULCC market share in P2P traffic in Europe was more than 80%, not to mention FR carrying more pax than LH or BA.
Looks like US3 strategy of building loyalty through credit cards, ability to transfer points/miles here and there and other perks pay off. In Europe there are very limited ways to pile up miles away from flying itself, thus loyalty is much less a factor than in the US.
I think it's more so the legacy carriers in the US are in far stronger positions than in Europe. The legacies in Europe effectively run their intra-EU and domestic flights as if they were ULCCs - with biz class being a normal seat with the middle blocked off, and the like. And the loyalty program model is far more robust and revenue-generating in the US which disproportionately aids the US3.
The relative gap between the...
I think it's more so the legacy carriers in the US are in far stronger positions than in Europe. The legacies in Europe effectively run their intra-EU and domestic flights as if they were ULCCs - with biz class being a normal seat with the middle blocked off, and the like. And the loyalty program model is far more robust and revenue-generating in the US which disproportionately aids the US3.
The relative gap between the LCC/ULCC vs. Legacies is just a lot wider in the US.
I think he also needs to be worried about his own airline. If there is a 2000/2001 or 2008-2010 style economic crash (which many are predicting) not only would UA (and DL, WN, AA and B6) see decreased air demand but far less partner income. And that would be a double whammy on the bottom line.
The ULCCs might feel it first but it would eventually come to the legacies. The other difference is that...
I think he also needs to be worried about his own airline. If there is a 2000/2001 or 2008-2010 style economic crash (which many are predicting) not only would UA (and DL, WN, AA and B6) see decreased air demand but far less partner income. And that would be a double whammy on the bottom line.
The ULCCs might feel it first but it would eventually come to the legacies. The other difference is that the government would likely bail out AA, DL, WN and UA but not so sure of an airline like Frontier.
All of this demand built up since 2010 was based on a strong economy and consumers willing to spend money on travel. People trying to survive on savings and unemployment (unless maybe they are getting $1K COVID style weekly checks) don't tend to book trips to Las Vegas or Disney.
"If there is a 2000/2001 or 2008-2010 style economic crash (which many are predicting)..."
There will be one in the future within the next 15 years, FOR SURE, mark my words!
note that he said that Delta and United would account for nearly all of the revenue and profit growth.
He wants to ride Delta's coattails and the two had very similar financials for the 3rd quarter; American reports tomorrow w/ the low cost sector to follow next week and beyond.
Delta, however, has $35 billion less new aircraft on order than United and Delta spent $400 million less than United on fuel due to...
note that he said that Delta and United would account for nearly all of the revenue and profit growth.
He wants to ride Delta's coattails and the two had very similar financials for the 3rd quarter; American reports tomorrow w/ the low cost sector to follow next week and beyond.
Delta, however, has $35 billion less new aircraft on order than United and Delta spent $400 million less than United on fuel due to Delta's better fuel efficiency and lower price per gallon due to its refinery. Delta's profits are more evenly spread throughout the year while United is already forecasting its profit for the 4th quarter to be half of its 3rd quarter levels. There will be a similar trend for the 1st quarter because United has much less presence in Florida and the Caribbean than AA or DL. Delta has the best revenue balance between international and domestic.
The big 3 is in the best position relative to low cost carriers - not just low cost carriers (Kirby's statement wasn't just about ULCCs) since 1978 when the domestic US airline industry was deregulated.
I personally think that these huge raises being given out are going to bite the big three, especially if we have another major downturn crisis. I just don't see how giving 40% raises across the board can be good in the long run. You can bet rank and file will want theirs too, frontline and maintenance and related and MGMT too! I see future bankruptcies for the Big three, especially with record new aircraft orders,...
I personally think that these huge raises being given out are going to bite the big three, especially if we have another major downturn crisis. I just don't see how giving 40% raises across the board can be good in the long run. You can bet rank and file will want theirs too, frontline and maintenance and related and MGMT too! I see future bankruptcies for the Big three, especially with record new aircraft orders, but I suppose you can just file bankruptcy to get out of debt like what was done in the past??? Only thing these airlines can't do to their employees is take away their pensions, because they already done that... All 3 of them!
Meh, if they want labor to stop asking for (commensurate) raises, all they have to do is stop offering (ridiculously high) raises to executive management every five minutes; even when it's been years since labor has gotten a comparative raise, usually after having taken a haircut during a recession/disruption, etc.
But since that'll never happen, they can fully expect labor to behave likewise.
In the near term, the legacies might win. But this would be the first recession where those with the highest cost base come out ahead.
Why is he so coy, then? Because the US abandoned the free market decades ago. UA will never, ever have to worry about bankruptcy with the state capitalism being pushed.
Because he knows UA can use the Chapter 11 process (again) to cut up new labor agreements, dump assets and leases, force vendors and debt holders to take a haircut and live on again. The lawyers of course will make out like bandits.