United released news about its Basic Economy offering at its investor day on Tuesday, but there was a whole lot more than just that. I’m going to get really wonky next week when I tackle President Scott Kirby’s fantastic explanation of what’s wrong with United’s revenue management system and how it’ll be fixed. Today, however, I want to talk airplanes. One of the bigger changes announced was the disappearance of the 737-700 order (or, um, modification into a different aircraft). That order was only placed earlier this year, so this is a very clear strategy change. What’s not clear, however, is what, if anything, will replace it.
United had been dangling a hotly-contested order for a new small narrowbody aircraft for a long time. United, like Delta, wanted to upgauge some of its regional flying to mainline airplanes. Delta found its stable of mainline aircraft was full of airplanes that were too big, so it settled on that sweet 717 deal with Southwest (followed up by a C-Series order). United had the same problem. Most assumed United would order either from the Embraer 195/E2 family, the Bombardier C-Series family, or there would be a Boeing surprise.
See, Boeing may not want to introduce a true 100/110-seat jet, but it also doesn’t want any of the new entrants (Bombardier and Embraer) to get a toehold in that market. Instead of letting Bombardier win a big order from United, Boeing swooped in with an ill-fitting product. It offered 737-700s which seat 118 people in United’s configuration. Operationally, that is far less efficient than a new C-Series, but the purchase price was right. Doing the math, it looks like United would have paid about $26 million an airplane. That’s a 70 percent discount off list prices. (Nobody pays list, but that’s a really good deal.)
So it was that United went all-in with Boeing. After an order for 40, it followed up with another order for 25. That’s a whole lot of 737-700s. Yesterday, however, United announced the order is toast. Here’s what’s happening, straight from the investor day presentation.
CFO Andrew Levy said the MAX aircraft will likely be -MAX 8 or -MAX 9 aircraft, but nothing has been decided. United already has 100 737-MAX 9s on order.
No matter what happens, it’s clear that United will no longer be taking delivery of any small Boeing narrowbodies. The big question is… will there be a replacement? We have to think about United’s strategy here.
Making Room for Connections
Time for a tangent. During investor day, Scott Kirby spoke a lot about how historically, United’s domestic network hasn’t been particularly profitable, unlike its international network. Now that the domestic market is wildly profitable for everyone, United is going to work to improve its domestic performance.
Part of that means creating better connecting hubs. Scott explained that Denver is the most profitable hub in the system now, and much of that is due to connecting traffic. Denver is as close as United gets to Scott’s previous life at American/US Airways with Charlotte, a fantastic hub built on high-dollar connections. It’s not the New York-Denver-LA connections that make money. It’s Jackson Hole or Billings or any other smaller city-Denver-LA (or wherever) that works. These are high fare markets with limited service. And Scott wants United to tap into that more, because he knows what a gold mine it was in Charlotte.
United already re-banked Chicago, but it can do a lot more. It’s going to make the banks omni-directional. The example Scott used was Green Bay. If there’s a flight from Green Bay into Chicago, it should connect west and east, not just in one direction. The biggest benefit is likely to be gained in Newark. During the presentation, Scott noted how Newark was more of a rolling hub while in his last job, Philly was sharply-banked. American made a ton of money off those Philly connections, and United can do the same in Newark. It’s funny, because when I spoke to now-former head of planning Brian Znotins earlier this year, he mentioned how Newark couldn’t be banked because of constraints. Apparently this new team disagrees.
With all this focus on banking, United is going to try to flow a lot more people through its hubs. That should increase volumes, and that means bigger aircraft can be supported. So maybe the 737-700 isn’t needed if the larger MAX aircraft start coming on the property. But that still seems unlikely. There’s still a large gap between the 76-seat regionals and the mainline fleet.
Maybe United management just realized that the 737-700 was a clunker when it came to operating costs. They were originally seduced by the low acquisition costs, but once this new team started examining how to use the airplane, they decided they really didn’t want it.
Might they want a C-Series fleet? My guess is that if they do, they’re going to pay more than they would have before. At the time of this deal, Bombardier didn’t have the Delta order. Now that company is on surer footing so United probably can’t get the same deal. Or maybe there are some used Embraer 195s sitting around that United could pick up, though that seems less likely. If either of those happen, then United will be allowed to also fly more 76 seat jets per its pilot agreement. So that’s a nice bonus.
Either way, it’s clear that United has absolutely no use for the 737-700. The fact that the order was placed earlier this year shows just how much of a change has occurred in management. There are a lot of wrongs that need to be righted, and this is a start. I just can’t quite figure out the next step here just yet. But once this is solved, United has already indicated it’s going to study its widebody fleet plans. Change is a comin’.