A Conversation With Myself About United’s Domestic Growth Plan

United’s third quarter earnings call did not go over well with Wall Street, and last week’s fourth quarter call? Well that didn’t go well either. This time, the airline ran it as an investor update, and President Scott Kirby used the time to school everyone on the rationale behind the airline’s strategy for growth. This was a fascinating discussion, and it’s a complex issue. Wall Street still wasn’t impressed, but I keep going back and forth on it. In fact, I ended up effectively having a conversation with myself trying to decide whether I liked the plan or not. So, I figured I’d just clean my mental ramblings up and put them here for all to see.

Let’s start with the easy part: what this isn’t about. It’s not about international and it’s not about the coastal hubs at all.
Right. United has spent years growing and refining its international network, building joint ventures, and strengthening coastal hubs. According to United, its international gateways outperform those of its peers. (That’s not a surprise when you have Newark and San Francisco, two of the best possible international hubs in the country.) It’s also not about those coastal hubs on domestic flights, apparently. Here’s the telling stat from the presentation.

So it’s really about the middle and it’s about domestic flying.
Yeah, the three hubs to focus on appear to be Chicago, Denver, and Houston. According to Scott, this whole thing is about geography and “natural share.” An airline should be able to achieve a certain market share just by existing in its hubs, all else being equal. So if someone is flying from Des Moines to Dayton, United should get a naturally-large share thanks to its Chicago hub. That, of course, requires there being enough seats and flights to serve those passengers, and that’s one place where United is falling down.

“Falling down” is probably an understatement. This is a self-inflicted wound.
Scott definitely ripped into his predecessors’ strategies, that’s for sure. He says the airline was so focused on shrinking to profitability over the last several years that it can no longer get its natural share. This is a function of several different issues.

  • It doesn’t serve as many small cities as it should and as its competitors do. (“Breadth” according to page 17 of the presentation.)
  • It doesn’t have enough daily flights to its spokes from each hub. (“Depth”)
  • The connectivity of the hubs hasn’t been set up properly, so opportunities were lost just by scheduling poorly. (“Connectivity”)
  • It serves bigger markets with aircraft that are too small. He loves using Newark-Atlanta as an example of a market that Delta had mainline on while United used 50-seaters. And Delta crushed United.

People have been talking about United’s underperformance for years. Most people have shaken their heads considering how good United’s hubs are generally considered to be.

United Has THE BEST Hubs (said in a Trumpian voice)
Scott looks at United’s domestic hubs and sees the best possible hubs in the US, but I’m not as convinced. Yes, United has hubs in the cities that have the most local traffic demand, and they are geographically-positioned well for connections. (Let’s not talk about the lack of ability to serve the Southeast. The rest of the country is well-served by United’s hubs.) The problem here is that these hubs may have the most local traffic, but that’s why low cost carriers flock to them when they can get gates/slots. So United finds increasingly that nonstop routes are taking a beating on fare levels. Delta doesn’t have that problem nearly as much in places like Minneapolis and Detroit. Same goes for American in Charlotte. More local demand is a double-edged sword.

And if the low cost carriers are making fares low on the biggest nonstop routes, then that means United is looking to escape to markets without that competition. And that means…
…connections are more desirable. Scott said awhile ago that connections were becoming much more attractive than nonstops for airlines. That’s strange to get used to that idea, but the reasoning is sound. Smaller connecting markets are the least likely to see low fare competition. They don’t have a ton of volume, but that’s why United wants to supersize the hubs. The more connectivity you have, the more seats you can fill in small markets. So you can support Rochester, Minnesota (Scott’s favorite example in the presentation) if you can get people from there to a ton of places frequently. It’s all about connectivity. That also, by the way, means doing a better job of banking the hubs to maximize connectivity to these small markets.

This is different than when a low fare carrier enters a market. It’s not a stimulation play.
Correct. When you think of an airline going into a new market, it usually goes in with the idea of bringing low fares and stimulating traffic. That is absolutely not what United wants. United wants to go in with the same fares that are in those markets today, but because of this whole idea of “natural share” that Scott likes, he thinks that United will then naturally start taking its allotted share of traffic. This won’t stimulate markets. This is just about stealing share from Delta and American.

But American and Delta are going to fight back, right?
This to me seems to be the biggest flaw in the plan. United can get its natural share if Delta and American don’t respond. But Delta and American will respond to defend their turf, and this could turn into a fare and capacity war. That’s what’s scaring Wall Street right now. They think this could be a sign that things aren’t really different this time around. This could hurt revenues depending upon how the big three all react.

But this time it’s about more than just fare revenue.
That is true. There isn’t likely to be a war on checked bag charges or any other ancillary fees, so the revenue is more stable than it used to be. The biggest pot of all when it comes to ancillaries, however, might be in the credit card world. Scott thinks that people pick their airline credit cards based on the airlines that have the most utility. If you live in, say, Lynchburg, Virginia, you’ll be most likely to get the American card because there is no other game in town. If you live in Columbia, South Carolina, you may choose between American and Delta. But United won’t really be in your consideration set. This is a big concern, because credit cards mint money for the airlines that hawk them. And United thinks it can really boost credit card signups in smaller markets if it offers better service.

It’s easier to get a new signup than to switch someone from an existing card.
That’s definitely one of my concerns here. American and Delta have probably snapped up most of the people in Columbia, SC who want an airline credit card by now. For United to get people to switch, that’s a tougher battle. I’m sure it will result in more signups for United, but I’m not sure how bullish to be on this.

So now United is talking about 4 to 6 percent growth annually over the next three years which is a lot. How is the airline going to fund all this flying?

There are two key ways to grow here. One way is pretty simple – United is going to just fly its airplanes harder. Scott had a great graph showing how much United backs off in off-peak seasons.

This is why we’ve seen load factors go through the roof — airlines have just stopped flying when planes aren’t full of good revenue. But the way Scott looks at it, these airplanes and all the airport infrastructure are cheap to fly from a marginal cost perspective. In other words, if you think of most of the costs as being fixed, the only additional cost incurred by flying the airplane is fuel, crews, and maybe a little bit of other stuff sprinkled in like snacks and all that. Talk to a casual observer and they’d say “sounds pretty obvious to me.” So-called “utilization flying” isn’t a new idea by any stretch. This feels like just another swing of the pendulum.

This should mean more consistent schedules seasonally (and maybe there’s even hope that the airline will stop changing departure times and flight numbers every day), but it also means that connectivity will be better for people in small cities all year long instead of just during the peak season.

That’s not going to fund all this growth.
Truth. The other part is an influx of small airplanes, and that sounds bat-shit crazy. Remember how hard the airlines worked to shed 50-seat regional jets? Well, United is bringing ’em back, baby. To be fair, this is temporary, I think. United stole Air Wisconsin away from American as a regional feeder, and with that comes a fleet of 50-seaters. United can’t grow in the 70- to 76-seat range now due to pilot scope restrictions, and the airline has nothing on order in the 100-seat range either. So 50-seaters it is. Nobody likes flying those airplanes, but these will be going into small markets where the option is 50-seater or no United service. This strategy will have to evolve in the next couple of years because it’s just not competitive.

Fleet is a huge piece of this.
Yeah, and United is not well-equipped. It is maxed out on 70/76-seaters unless it orders something to be flown by mainline in the 100-seat range. There was a plan to order a bunch of 737-700s, but when Scott arrived, he killed that bad plan quickly and moved to bigger airplanes. Meanwhile, Delta has a fleet of 717s and an incoming fleet of C-Series aircraft that really help the airline turbocharge the hubs. United has none of that, and it’s going to have to do something.

So is this going to work?
It all sounds well and good on paper, but there is risk. American and Delta won’t just sit there and let United take its “natural share.” This could result in pricing and capacity wars which would not be good for any airline. (The public will gladly take it, however.) I also don’t think it’ll be as easy to woo new credit card holders as Scott made it sound. And then there’s the fleet problem. I can certainly see where the strategy came from, and why the airline is giving it a shot, but I’m not convinced it’s going to end well. That being said, I’m also not convinced it’ll end poorly, so… this internal conversation hasn’t helped one bit.

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51 Comments on "A Conversation With Myself About United’s Domestic Growth Plan"

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Wild Bill
Guest

Where does it say in the presentation that UA will devote resources to Customer Service? Re: http://www.foxnews.com/travel/2018/01/28/united-removed-woman-from-flight-to-see-her-dying-mother-nobody-flies-for-free.html

SirWired
Guest
Speaking as somebody totally outside the industry, there’s something that bothers me about an airline making a co-branded credit card a major part of the profit plan. As the majors have devalued their FF miles, and made it harder for credit-card holders to leverage that into elite status, 2% cash-back cards start to look awful tempting as an alternative. These cards are cash-generators now, but how long can that continue? And I agree there have to be a limited number of signups left; rarely a week goes by when I don’t get at least a couple airline credit card offers… Read more »
TimH
Member
I moved from a branded credit card to a 2% cash back card and have no regrets. I no longer fly enough to get status based on segments or miles, and the last few times I’d redeemed miles I’d averaged around $0.02 of value per mile anyways. In exchange, I was limited to only one airline (and its partners, but still), to the flights that had available rewards, and was paying $95 a year for the privilege. This way, I don’t pay $95, I earn the $0.02 in cash (every month), and when I do travel I can just chose… Read more »
Anthony
Member

As far as I know, the only airline credit card that doesn’t levy an annual fee is Jet Blue’s. But I don’t fly B6 very often… and even if I did, cash-back is still a better deal.

andersoncd
Member

It’s an interesting United story.

A week from today we’re taking United, TPA to Houston to Sydney, business class. No other fares in the industry came close to United’s business class fare to Sydney.

This will be our 2nd time to Sydney utilizing United. The 1st trip was not bad so we’re trying United again.

Greg
Guest

RE: Fare war. It’s not like they’re focusing on bulking up capacity on trunk routes like ORD-LAX – which is what used to spark big fare wars. Could it temper industry yield growth? Sure. But different turf than what we used to see.

Good analysis as always.

Kilroy
Guest

I realize I’m in the minority here, but as a pax I’m disappointed that UA isn’t looking to Dash-8s instead of RJs. For smaller cities reasonably close to the hubs (e.g., Des Moines to ORD) the block time would be similar.

Itami
Guest

Indeed. And holding distance constant, you should get better fuel burn with larger gauge as well compared to a 50 seat jet.

Kilroy
Guest
For flight lengths under ~500-750 miles, the difference in gate to gate time between turboprops is minimal, especially when you are flying in or out of major hub airports. Assuming labor is about the same (not sure what Dash 8 pilots & FAs get paid compared to 50-seat RJ pilots & FAs), the operating economics would certainly appear to favor turboprops, though the capital cost of RJs may be so cheap these days to negate that cost advantage. Also, fuel has been holding fairly steady and has been (relatively) cheap the past year or two, and is predicted to do… Read more »
TimH
Member

I’m a fan of turboprops, too, but whenever I go to a small city, the locals always seem to make a big deal about whether or not they get to fly on a jet. My bet is that there’s some marketing benefit to an RJ, plus, there’s tons of 50 seaters around that can be had for a song, and that isn’t true of turboprops.

Kilroy
Guest
I agree with all of the above. As much as I love turboprops and argue that for appropriate flight lengths (say, < 700 miles) they are more comfortable than RJs, I'm sure there's a marketing benefit from offering service on RJs. With fuel being relatively cheap and not terribly volatile the past year or two (and forecast to continue that way through 2018), the fuel savings from turboprops isn't very significant. Surprised Delta or one of its regional affiliates hasn't snapped up a bunch of RJs on the cheap. I know there are union work rules etc, but one would… Read more »
Tim Dunn
Member

The most efficient aircraft are mainline aircraft – not just for fuel but for labor costs as well. It takes two pilots to fly a US commercial aircraft; the incremental cost of pilots to fly mainline aircraft holding 2 times or more the number of passengers is small compared to the increased revenue.
Delta is shifting more of its flying from regional carriers to small mainline jets because it is more economical to do so. Nearly 5 years of 717 operations have confirmed it and the C Series will further accelerate the process.

Patrick
Guest

As a resident of Columbia, SC, United is too little too late on capturing our market. And more flights probably won’t change that. Cranky’s right on point that folks who fly a lot have already made their decision – both in terms of credit cards and airline loyalty. About the only reason I’d have to switch is for Star Alliance when I have to travel internationally.

Benjamin
Guest

When United and Continental merged, it was a marriage of two disfunctional problem children who mistakenly believed they could solve each other’s problems (kind of like my parents). Instead we have a larger, more problematic and underperforming carrier that can’t quite swing its arms without slapping itself in the face. There is absolutely nothing in United’s “Plan” that would make me choose their airline or their credit cards over American.

Jason H
Guest
Several years ago I flew a lot more for work and easily made gold tier on UA. Back then, status actually meant something so I had an incentive to stay with UA. Have to fly DEN-YUL? I’d take UA through ORD. Now, I don’t fly as much (~30k-35k instead of 55k-60k) and the FF program really only rewards 100k fliers. So when I fly now I just choose any airline. Going DEN-BRU next month and I’m on BA because they were the least expensive. If UA wants to attract fliers they need to give us something for our dime. Safe… Read more »
southbay+flier
Guest
No one likes being on a CRJ for any flight that is over an hour in the air. I would do anything to book away from that. I’m on one tomorrow, but it’s for a 38 minute intrastate flight to a regional airport that can not support traffic in anything larger. That’s what those planes were meant to do. Also, going into any small market form ORD that AA already serves such as CMI means that UA will have to lose money to break into that market. CMI has had a monopoly at CMI for years and since UA is… Read more »
Name
Guest

Southwest is gonna be in trouble. Chicago, Houston, Denver are 3 of their biggest hubs, and with additional costs rising there, I think your going to see LUV fading faster than the big 3

davidp627
Member

Is this being said tongue and cheek? I wouldn’t count WN out. Also, they fly from MDW not ORD. I seriously doubt we will see WN “fading faster” than the big 3, assuming that the big 3 even fade at all.

Eric C
Guest

The youngest CRJ-200 is 12 years old, has a 40,000 cycle limit, and is flying about 2500 flights per year. There’s not much life left in them before they’re all gone.

Kilroy
Guest

Does anyone know if there is a chance that the cycle limits for RJs will be extended/upped? Any programs in the works to that effect?

Eric C
Guest

I was told the main gear struts aren’t doing well enough in late-life NDT to warrant an extension. But that was scuttlebutt from the line years ago. It’s telling that operators are pulling younger frames from the desert while parking their own. The 200 is basically a Challenger and so an awful lot of it was never built for this much service and now have a miserable high failure rate. The 7/9/10 have a lot of new internals designed for airline service and have held up better.

Kilroy
Guest

Very interesting. Appreciate the information, thanks.

TB
Guest
What a dilemma for United, and your comment about fleet is huge. I think one major problem United faced after the merger was its gauge in medium-sized cities (CMH, BNA, GRR, even MSP). Way too many 50-seaters were deployed on these routes and that harmed both margins and market share everywhere in the middle of the country. I believe at one (brief) point in 2013 BNA was 100% ERJ-145s to every hub. They’ve solved that glaring issue in most places, but the absence of a 100-seater type aircraft at United, as well as the proportional increase in CR2s is going… Read more »
Nick Barnard
Member

I have to expect that UA will do something in the 100 seat market sooner rather than later, they’re probably just not ready to announce it..

Maybe they’ll get E2-175s or E2-190s at a good mainline rate? Or perhaps they’ll go the CS100 route?

Or you know they could go buy up a bunch of MD-80s and the like, I hear DL and AA have a few to sell.

Bigsix
Guest

This is already beginning to happen at GRB. Last fall, UA started flying CRJ7s and E175s to ORD. DL has started to respond with 717s, MD88s, MD90s, A319s and A320s to ATL, DTW and MSP. I am looking forward to DL flying the new CS100s to GRB. This new UA strategy can only be good news for GRB and other like-sized airports.

Tim Dunn
Member
Great article and great job of looking at the all the sides, using UAL’s own data that shows why American and Delta do better in the parts of the country that United wants to target. United’s problem is lack of strategic consistency. I’m not sure anyone knows whether UA will succeed at its restructuring but it counts on the rest of the industry letting United regain what it lost. You accurately note that UAL’s plan involves a lot of costly 50 seaters because of scope limits. Also worth noting is that UAL is still not generating enough cash to fund… Read more »
SAN+Greg
Guest

After United Express stopped serving Carlsbad almost 3 years ago our travel on United went from both of us being 1k’s to one or two round trips on them a year. Small markets do matter!

mattnrsa
Member

How much of the problem comes down to the higher costs of UA’s hub airports? Cost per Enplanement (CPE) is relatively low at ATL for DL (along with many of their other hubs) versus what you see for UA hubs. Seems like an extra problem on top of the LCC exposure.

Itami
Guest
All this “natural share” talk is frankly hilarious at this point. I respect Kirby, but this is a flailing attempt at finding a politically correct way to say “share war” in a way that won’t spook the markets. Spoiler: It never worked. Honestly, you’ve gone over most of the other flaws in this well, Cranky. The only other thing I’d mention is that when you look at creeping fuel prices and the fact that the world’s 50-seaters are growing longer and longer in the tooth, UA will be hard pressed to execute this plan in a way that doesn’t balloon… Read more »
Mark
Guest
United likely got a steal on the Air Wisconsin contract and can easily use them as the old “throw it at the wall and see what sticks” strategy until new RJ’s show up and can be deployed on the winning routes while the underperforming routes go away. They could also grow capacity by putting in new, nice, consumer-friendly seats that happen to take up less space on mainline aircraft. Adding capacity in these types of markets is an easier way to tell wall street that they replaced the cheap ULCC stimulated traffic with higher yielding RST people and that their… Read more »
Marissa
Guest
United won the contract to supply service outside of summer at a our local airport in Wyoming; previously it was Delta. I stopped flying UA several years ago because of the unreliability and went to a much larger city where there are mainline flights. But that comes with a penalty in terms of staying overnight at the beginning and end of multiflights overseas, as well as dodgy driving in the winter. If the CRJ service ends up being more reliable I might go with UA from the local airport. For me, it’s all about reliability and less about have to… Read more »
jaybru
Member
Start with branding, when you hear United, what do you think of? Quality? Not anymore. Aircraft you can’t stand up in, certainly not what you’d choose if you had a choice, and hours and hours in those cramped planes. Fares, cheap, unbundled, like $40 OW DC to Vegas, or $205 regular, normal economy. Does this pricing make sense? Service to every which place, like I’m going to every little city every day. Someday, we’ll have someone called Allegheny making the milk runs to handle the spokes United is running now. United to me, has become “Spirit by United,” “Mesa by… Read more »
Nick Barnard
Member

AFAIK, you do branding last. Instead of putting lipstick on a pig, you replace the pig with a wonderful friendly and well behaved canine, then you introduce everyone to the canine that has replaced the pig.

If you put a new brand on a crappy product, you soil the new brand, and have the same problem again.

Chicago Chris
Member

Cranky, any reason why the focus is on 50-seaters? I think under the scope clause United Express could also add 66-seat CRJ-700s and E175s. The 175s are rather nice for an RJ.

I suppose they might be able to get Republic to bring back the Q400s. They actually weren’t that bad compared to the Q200.

dc.contarino
Member
It’s interesting that UA hasn’t pursued the 100-seater strategy yet, because IIRC Kirby (while at US) was THE first in the industry to get a handful of 99-seat E-190s and have them flown by mainline crews. That experience must’ve left a really bad taste in his mouth, considering nothing like it has been done yet at UA. And considering getting some 100-seaters would allow them to get more 70-seaters per the scope clause. It’s kind of a no-brainer, so I’m curious why he hasn’t done it yet. Is having a smallish sub-fleet THAT inefficient? Seems like the benefits would outweigh… Read more »
Alex B.
Guest

For all the Wall Street criticism of this approach from UA, I’m not sure what else they think UA should be doing. They tried shrinking, and that sure didn’t work. So they’re gonna try growing.

The approach seems sound to me, if a bit risky and hard to pull off. But I’m not sure what other choice they have? Particularly one that Wall Street analysts would find more palatable?

JuliaZ
Member

I’m Seattle based and I’m Alaska MVP Gold, so I don’t care too much now. But eventually my home airport will be Denver, and that’s going to make AS much trickier, since to go anywhere, I’ll have to go to Seattle first. Frontier is hopeless and I won’t fly Southwest, so I suspect I’ll be looking more at United. I hope they get their act together.

AC
Member

Would there be any point to building back one or two smaller city fortress hubs just for the sake of connecting these newly served city pairs? Cleveland could have remained for this role, for instance.

A Kindred Soul aka Norman L. Wherrett, Jr.
Member
A Kindred Soul aka Norman L. Wherrett, Jr.

You’ve not commented on UNITED’S labor relations.  One cranky (no pun intended)…OK, bitchy…FA ended our family’s flying anywhere/anytime on United Air Lines fifteen (15) years ago.   Dr. Norman L. Wherrett, Jr.Round-The-World Traveller

SYVJEFF
Member
Ironically I flew into Columbia, SC 6 days ago and back on Friday. Here’s my thoughts…..I live near Santa Barbara, CA and up until 9 months ago I decided that the drive to and from LAX tiresome. So I’ve been trying UA/AA for my flights out of SBA to where I need to go for business. Here’s the verdict, I’ve had more longer delayed flights than LAX based flights. Now regarding Columbia, SC – Nice vibrant downtown with technology companies, military and college presence. Getting there on paper was good, really getting there was rough on UA from SBA. First… Read more »
A
Guest
I’m a day late to the discussion but it seems kind of absurd to me that UAL thinks their non-coastal hubs are better than DL or AA. While ORD has a huge O/D demand it’s the butt of jokes only bested by the mess that is JFK or LGA. For the hypothetical customer at RST unless your destination is ORD there is no reason I can imagine outside of pure fare price that would make someone desire a connection at ORD over MSP…which is literally so close that there are shuttle buses between the two cities. Besides, they have to… Read more »
EndlosLuft
Guest
Simple flaw in the strategy. Since essentially all frequent flyer perks have been unbundled why not get more than one airline credit card? It makes zero sense that credit card holders get Group 2 boarding. They would be just as happy with Group 3. But that frequent flyer who actually spent major money to fly and earn that 50K status is pretty miffed. I used to be a very loyal frequent flyer with United. But not anymore. As my income is growing I’m paying for the best, typically premium, ticket and could care less about the frequent flyer program as… Read more »
Tower18
Guest

Yeah, I have the United card simply for Group 2 boarding. I fly enough for status on miles and segments, but not usually w/the weird way they calculate spend, so I got tired of boarding 3-5 so often. The card’s annual fee was worth it vs. paying for Premier Access each time, but I never use it to purchase anything (except sometimes I’ll buy vacation itineraries on it so the family can get free bags).

TDF42
Guest

For once I would love to hear what people think UA should do instead of the obvious criticism of the the previous mistakes management team.If you dont think they should grow market share at their hubs, then what?