United CEO Scott Kirby was recently interviewed by my co-podcaster Brian Sumers on stage at the APEX Expo in Long Beach, and I made my way down the road to attend. You may have heard about some of the barbs that came out of that interview, but to me, that was the least interesting part of the discussion. In the wide-ranging chat, Scott started talking about a trade deficit with international airlines. This caught my attention, and I can’t help but think he is starting to play a very long game.
It’s hard to fault any airline CEO that looks this far ahead into the future, because so few do. Airlines have long been such messes that CEOs have struggled to think several months ahead, let alone years. But since United continues to execute on its plan and turn in strong profits, Scott can now turn his gaze far into the future to figure out what the next war will be.
The Scott Kirby View of the World
We’ve all probably heard Scott’s relatively-new mantra that there are two brand-loyal airlines in the US: Delta and United. These are the companies that can offer a broad spectrum of product offerings and get people to actually choose them. Everyone else will be fighting for the price-sensitive traveler. (I assume he means global carriers, since Alaska should fall into a similar bucket but just not on the same scale.)
There will always be a price-sensitive traveler, and he says there will never be a shortage of low-fare airlines. They may come and go, but someone will fill the void. He does continue to say that travelers hate the current ultra low-cost carrier (ULCC) model and he believes it’s dead. It is, according to Scott, a ponzi scheme on costs (think about sale/leaseback transactions) and a bait-and-switch on revenue. We could talk about this for days, but that’s not the point here. I’m just trying to set the stage.
Scott strongly denied that United has an interest in Florida if Spirit fails. Or perhaps it does have an interest, but he doesn’t see a winning path, so he won’t try. He says “at United, we fight battles where we have the high ground.”
Chicago is a perfect example of what he’s talking about. In Chicago, American has added scores of flights recently as it realized United was going to capture gates after carefully studying and understanding the allocation procedure. Scott, who repeated the mantra “it’s just math” often, says American is currently losing $800 million a year in Chicago. To make his point, he channeled a country star.
I’ve closed three hubs, [Delta President] Glen Hauenstein has closed four…. you gotta know when to fold ’em. Kenny Rogers had it right. If you’re not going to, you just dig the hole deeper and deeper.
But notice that in this, Scott is saying what American should do. He believe United sits there comfortably on the higher ground in Chicago, having positioned itself well.
With the view that United has set itself up well with solidly profitable hubs and an incredible international network, what exactly is Scott’s next move? We got a preview of that during the talk.
The Global Trade Deficit
We all know that United has the broadest international network of the US carriers thanks to its big hubs, but everyone knows that this is a cyclical business. Demand will drop internationally. There will be (more) wars and (more) airspace closures and all other sorts of things to create choppiness. Scott clearly knows this, but he also thinks that United has a lot of room to grow even if that were to happen.
This comes down to a belief that US carriers are not earning their fair share. Scott has, of course, used the term “natural share” to describe United’s underperformance in the domestic market before, but on the international stage, he’s no longer concerned about the other US carriers. With the other US carriers, he thinks he has the high ground.
This new campaign has shades of the fight against the Middle East carriers (ME3) from last decade, where American’s then-CEO Doug Parker and Delta CEO Ed Bastian got together with others to try to fight their big subsidies. We all know how that went. American is now very tight with Qatar Airways, and Delta has been talking a big game with airlines in Saudi Arabia, of all places. That was a losing fight, and they gave up.
What Scott is saying now is different and vague. He says that US airlines have about a quarter of the international seats touching the US, but 60 percent of the passengers on those flights originate in the US. That is what he calls a trade deficit.
That language simply cannot be by mistake. Scott knows very well how concerned the current US administration is about trade deficits. If he can frame this right, maybe he can get some federal assistance in his battle.
He knows that foreign carriers will likely always have an advantage. There are heavy subsidies for some, and some aren’t run like an airline business. Instead they are treated like an arm of the country’s tourism board. But unlike the previous ME3 fight, Scott isn’t looking to stop what they are doing. He is presumably looking for the US government to help create a level playing field.
I don’t know what he has up his sleeve, but you can be sure that he has something he wants or he wouldn’t bother saying any of this. This is a long-term play that can only come from a CEO who is focused on the distant future. And if he does find a way to reduce that so-called trade deficit, then United will find itself with a spot on the global high ground.
