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’.
“American made a ton of money off those Philly connections.” Charlotte a profitable hub like Denver. So, how did US Air manage to lose money year after year if those hubs were so profitable? Anyone who was forced to fly through Philly knows it was an operational mess. Hard to believe that an operational mess makes a ton of money.
hbeckner – US Airways was a bloated, mismanaged mess before America West rescued it from liquidation. But it was highly profitable once Kirby and the team took over. As for an operational mess being profitable… there’s a reason it’s a mess. Airlines see profit opportunity and put airplanes there.
CLT and DEN are very different types of markets. CLT has a small local market with little low cost carrier competition which means that AA has considerable pricing power. There are indeed lots of connections. DEN is a much larger local market where UA does not have pricing power in most of the western US markets because of WN’s size. RJs, even large RJs are not a viable solution to allow UA to compete against WN in the local market and neither are 737-700s, the highest CASM variant of the 737. UA has to use larger gauge mainline aircraft but they risk diluting the yield as they add capacity but since WN already has the majority of the local DEN market, UA has to act or lose the market.
UA might want a C series or other large mainline RJ but the acquisition costs are going to be higher for any model. The 717 works for DL because it was practically given to them and its economics are primarily suited for point to point markets or in hub service in higher average fare markets.
Ironically, Boeing efforts to push the 737-700 into UA probably helped DL get a better price on the C series which, even at comparable prices to the 737-700 (and indications are it might have been a little less), is a considerably more efficient airplane on a per seat basis than anything else below 150 seats.
UA’s overall domestic strategy involves trying to now fix what should have been fixed years ago…. rebanking Newark now will be much more difficult now that slot controls have been lifted and new capacity has been added which means that rebanking could lead to greater delays than existed in the past.
AA is cutting PHL capacity and flights to a fairly great degree even though PHL has a lot more capacity than any NYC airport. AA and UA might share the same problem of having too many hubs in the eastern US but the solutions that work for AA won’t work for UA and vice versa.
The notion that rebanking hubs will solve all of the problems is flawed because there is only so much connecting traffic which all of the big 3 are going after while low cost and ultra low cost carriers are picking off the biggest local markets even from small cities that are served only to hubs by the legacy carriers. Factor in that Delta is a couple steps ahead in having closed hubs and in using larger, more efficient aircraft even in small cities and chasing small city connecting traffic with a higher cost base is only going to lead to reduced profitability.
Where does IAD fit into all this? Will it just be an international hub? UA seems to have reduced domestic flights to/from IAD over the past few years.
Chris – They didn’t spend much time on Dulles in the presentation. In short, they say it’s a high cost airport which is important to the airline. As long as the perimeter rule is in place, it’ll be good but because of high costs, it’s more about international.
I thought only DCA has a perimeter rule.
Ondra – In the DC area, that’s correct. But the point is that Dulles remains more relevant as long as DCA is restricted from flying transcons.
If it goes away at DCA, then it’s bad news for Dulles.
What does “banked” ?mean when talking about hubs, about a third way down in the article.
tony – Airlines create banks in their hubs so that a whole slew of flights arrive, passengers move on to the next flights, and then those airplanes depart. It creates peaks of activity with lulls in between. It’s great for revenue, because it shortens connecting times and makes options more attractive to customers. But it does strain airport resources.
Maybe it’s nice to give an example: Keflavik Airport in Iceland. Look at their departures: http://www.kefairport.is/English/Timetables/Departures/
Take out SAS and EasyJet and just focus on Wow and Icelandair. To take the last one as example: You can see a bunch of planes leave between 07:35 and 08:10 (date: November 18th). Then nothing leaves until 16:30, when another bunch of flights leave until 17:10. That’s 26 flights, with most of them 183 seats. In the afternoon, this means 2200 people leave in 40 minutes and the rest of the day there’s ‘nothing’ to do. The airport has to be built for 2200 people, while it’s sitting empty the rest of the day. So, for Icelandair this is great, for the airport not so much ;).
The arrivals follow the same principle, also all around the same time. That’s a bank.
Must be hard to buy a $26 million airplane when passengers don’t want to spend more then $100 for a ticket.
Years ago United used to have a dedicated agent look at flights 12-24 hours in advance and assign seats together for families. Since we can see who is actually ticketed (most likely to show up), how hard would it be for them to assign someone to do this – even 4-6 hours before a flight ? Then they could look at multiple name PNRs, determine if there are children (because the d.o.b. is there), and just pre-assign accordingly.
United (and other airlines) could spare themselves and families so much grief if they did this.
God forbid they should just be different and not dumb down to the lowest level (Spirit and Frontier). This will do nothing to endear people to fly United.
Why should someone who is too cheap to buy something other than basic economy inconvenience those who paid more for tickets that came with seating assignments? I know that gate agents have a a row or two in the back of the plane that are not preassigned and they can try to stick people together back there. But, you live with the ticket rules based on what you purchased.
I only trade seats if I get something that is not worse than what I have. I would never trade an aisle or window for a middle or I would never trade an exit row for a normal seat (someone asked me that once and they were surprised that I said no)..
will move this comment to the other article.
@tony.romano: decent explanation of banking strategies here – http://airwaysnews.com/airlines/analysis-american-airlines-rebanks-dfw-and-ohare/
Any possibility of UA approaching Mitsubishi for a launch-customer deal on a further stretch of the MRJ? A stretch of the COMAC ARJ21 that’d make it basically a 717 clone could work if the price is right (it might be a bit “heavy” for this mission; as has been pointed out, the 717 only works for DL because they got the things so cheap), but politics could enter into it at that point (and the fact that the project has only delivered 2 jets so far.) And speaking of politics, in Trumpamerica perhaps the Superjet 130 with P&W engines?
If none of these options are viable, UA is either going to have to pony up for Embraers or C-Series, or just live with the gap.
BTW, I’m not holding my breath on a US airline buying Russian airliners anytime soon.
Craig – I guarantee there is no way the ARJ will be in the consideration set. As for the MRJ, that thing has enough problems getting into service. That’s too small, and a stretch would be years away. It’s a non-starter.
So UA wants to push traffic to their hubs and the example used, Green Bay, means a likely connection in ORD??!! It didn’t take me long to learn that unless Chicago is my O/D airport I’m doing everything humanly possible to avoid connections there. One of the absolute worst hubs in the entire US system and UA wants to expand. C’mon, that’s the dumbest thing I’ve heard in a while. No wonder their on-time performance sucks.
A – It’s that or nothing for United.
Moreover, ORD is not the airport it once was. They’ve been pouring billions of dollars into improving it and it can handle a lot more capacity than it used to. This will continue to increase as the next runway opens. Frankly, UA has bigger headaches at SFO which is often more delayed.
Banking Newark, an airport that has no room to grow, is a far more interesting issue. It’ll be really interesting to see how UA fares there.
Personally, I was quite surprised when United placed the order for the -700s. In the long run there is almost no acquisition price that will offset the difference in operating costs between a too-large -700 and a more appropriate C-series or E-190. So it looks to me like United has converted the -700 order to airplanes of a size they will require at some point and even adjusted delivery so they can be phased in as needed. That suggests to me that an order for smaller aircraft is coming, but whether it will be Bombardier or Embraer depends on the deal they can get. In that regard, I would put my bets with Embraer.
Cranky, I’m not sure the B737-700s ever made sense for United. It’s too big an airplane and I’m not sure the operating economics are that much better than the A-319s that United is leasing from China. I would imagine that should United want a higher-end airplane in this capacity range, they’d do a Delta and scour the world for lightly used A-319s, which fits their current fleet plan more effectively than yet another brand of airplane.
The problem is that lightly used A319s aren’t available at the fire-sale prices DL picked up the 717s at. The 717 would have the same cost issues as the 737-700 if DL hadn’t gotten such a bargain.
Delta always seems to be able to get a right sized airplane on its routes and has figured out how to acquire them at a good price. United seems to have trouble replicating that. The 737-700 seems great for medium length, thin routes, but not necessarily short haul regional routes. The 717, C-series, or E jet seem more appropriate for that.
Delta’s fleet complexity allows it to have as close to the right aircraft as is possible for a route and that often includes two generations of aircraft that could be used for the same mission. At the bottom end of its mainline fleet, which AAL is eliminating and UAL does not have, DAL has not just 90 717s which is a 110 seat aircraft good for 2 to 3 hour flights but also the C series will push that to transcon distance if DAL sees the economics in operating a plane that small for that distance; the CS300 will still deliver far better economics than the 737-700 or A319 (of which DAL has both). It is noteworthy that DAL has chosen both the A321 and 739ER even while keeping the largest fleet of 757s.
When you operate close to 100 or more copies of the same or a sister aircraft, the price for fleet commonality is just not as big of a difference as it is for smaller airlines – and even for LUV.
It is also noteworthy that DAL and LUV both reported the same 15% domestic net profit margin for the 2nd quarter compared to just under 10% for UAL and 4% for AAL.
Having the right aircraft matches revenue generating capability to the right cost base.
DAL uses its more complex fleet to generate revenue premiums while LUV uses fleet simplicity to minimize costs. Both strategies are clearly viable but DAL’s strategy more closely fits the type of networks that AAL and UAL operate.
I strongly suspect that AAL and UAL’s lack of a cost effective 100-120 seat mainline aircraft will result in a difference in financial performance between DAL on the one side and AAL and UAL on the other that will only grow.
You kinda wonder if airlines haven’t gotten a little bit too big to manage–from setting up every which route to screw the competition then figure out what aircraft to buy, crewing, coming up with some new more complex elite-to-bare bones fare system, inventory manage to beat the band, MileagePlus miles that no one has every quite figured out (or cared), a strike here or there, a computer glitch more than likely caused by some disgruntled employee or contractor, and then, oh yeah, us “little people’ just trying to get from here to there.
The day after the October computer glitch, I was on a UA 738, flight 650 scheduled 8:35a departure, at LAS going to DEN to connect to IAD–but “Awaiting Aircraft,” well the aircraft was there but apparently not the crew, and connections going to who knows where and the poor gate people, going “What’s happening?” Anyway, a crew shows up to much cheering, and all 70 of us (Friday morning, FROM LAS! ) get on the very, very sharp looking ECO-Skies beauty (was that McDonalds doing the fueling?). I noticed the my boarding card had a lot of pen marks, and then I noticed my assigned seat 7F had been changed to 8F. Of course the 7 row was empty, we got everyone seated, and we backed out, and just before we turned to head out to the runway, the group of flight attendants came back our row and said the pilot wants our row to find other seats, weight and balance, they say, so we collect our belongings and back we went to wherever.
Hello! Am I on Cape Air or Sun Air? You would have thought maybe the computers would have taken care of all this before we boarded, but maybe the powers that be were being busy canceling their 737-700 orders, whatever. It’s always something, isn’t it! Just wait ’till we get “N” class!
Can someone elaborate more on the omni-directional hub banking? Given the example of Green Bay to Chicago, does that mean an omni-directional hub would enable a Green Bay, Chicago, Phoenix connection as well as a Green Bay, Chicago, Detroit connection?
warreng24 – Yep, that’s it. Airlines historically created directional banks. So a bunch of airplanes would come in from the west, and then go on to the east. The next bank would reverse. But in some places, you want to have banks that go in both directions because there are natural connections that’ll flow both ways, as is the case with Green Bay.
Embraer has announced a transfer of an existing order of 24 E175 aircraft to United Airlines. Interesting and looks like a big part of the puzzle to me.
Thor – That’s actually not a net gain. Originally Republic was going to buy those airplanes and operate them for United. Now, United is just going to buy them and have Republic handled the operating piece. So these were airplanes that were already on the books.
Along this line of thought…what is happening with the Republic CSeries order? Could UA be poised to pick those up instead?
I’m with you on this. Republic could have dumped the order at any time in their bankruptcy. They haven’t yet. The price must be excellent since they were a launch customer. Maybe UA, maybe DL?
Wasn’t the order for the -700s placed during pilot contract negotiations? Big order for shiny new metal, getting delivered quickly. Makes pilots drool think about upgrades and captain pay. Gotta wonder if it was a ploy to get them to accept a contract in exchange for the promise of quick growth.
Mikebeau – It’s pretty incredible that Republic didn’t kill that order in bankruptcy. Instead, it deferred the aircraft. But there is no way Republic is ever going to be able to operate that airplane for a legacy airline, so I can’t for the life of me figure out the end game. Could it just lease the aircraft to United and let United fly them? Yeah, sure, but I don’t see why United would do that.
Who do you guess gets the -700’s now CF? Luv? Maybe Boeing will discount them even further? Tough to get rid of 65 NGs I would think…
It’s not like they are sitting on a car lot like a leftover Pontiac Aztek. They haven’t been built. The production slots will be used to build something else.
Blake – I’ll echo what was said. These aren’t just airplanes sitting on the ground looking for a new home. Boeing just won’t produce them. It does have an issue of trying to keep its NG line humming while the MAX production ramps up, and that’s one reason United got those airplanes so cheap in the first place. But I’m sure Boeing can adjust.
This has been an exceptionally educational thread: hub operations, fleet planning and ordering, plus a bit about the different types of markets… bravo!