Leaked: United CEO Scott Kirby’s Grim Forecast—Low-Cost Carriers On Brink, Spirit Airlines Doomed?
by Gary Leff
United Airlines CEO Scott Kirby laid out the competitive landscape of the airline industry for his employees. Live and Let’s Fly reviewed the video. United is doing well, Kirby is overly optimistic. He offers important insights but the path is far more fraught for the airline than he lets on.
Kirby laid out Delta, United, and Alaska as equally profitable – he adjusts the numbers to get there – American as break-even and then everyone else as money-losing even without recession. Aviation watchdog JonNYC shares this slide from Kirby’s presentation:
UA: pic.twitter.com/hGmoQzwmHb
— JonNYC (@xJonNYC) August 14, 2024
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And he says Spirit Airlines could be going out of business:
[T]he low-cost carriers are just a disaster. These are going-out-of-business numbers for a number of these airlines. You look at Spirit Airlines for example at -30%. That’s a number that is hard to put in context. But if you thought about that at United, if we had a -30% margin, it would mean we actually lose $4.5 billion in a single quarter.
The low cost carriers have faced several headwinds:
- They’ve become less low cost. They pay the same for fuel as everyone else. Labor has gotten more expensive.
- Consumer preferences have skewed more premium. They haven’t had the products people have wanted to buy. Even where they’ve been able to sell their seats, it’s been at a discount, while other airlines have earned a premium. We don’t yet know whether this lasts. There was intertemporal substitution coming out of the pandemic and strong consumer balance sheets. We’ll have to wait for time and recession to show whether the shift is structural.
- People have wanted to travel abroad. Where low cost carriers do international, it’s to Mexico, Caribbean, and close-in Latin America.
United and Delta are the most international-focused, and also the big airlines that have been profitable. American relies on partners for much of its international, having retired their Airbus A330s, Boeing 767s and Boeing 757s during the pandemic – they haven’t had the planes to fly long haul (Boeing delivery delays aside) and their strategy has been to eschew widebodies in any case.
Kirby acknowledges that margins are down even for United and Delta – without recession. Everyone complains about ‘too much capacity’ which is another way of saying that the number of seats in the market has led to discounting while costs are also up. Pilots are making more. Mechanics are making more. Flight attendants are making more (and soon will at United, too). This underperformance is even before any recession.
He says that recession doesn’t matter… but only for employee’s jobs. And here I’m skeptical.
First, we have set United up with the goal that we will never again have a systemwide furlough at United Airlines. And we’ve done that, I’ve talked about that before, by carrying more cash on the balance sheet, by being at the top of the industry in profit margins, and by continuing to pay down our debt. We’ve still done those things.
Is he really saying that just because United has cash they’ll spend it to keep employees paid rather than shrinking their workforce? United was behind only American with the world’s second largest furlough during the pandemic. They were ahead of all other airlines in planning for a collapse in air travel at the start of Covid.
More broadly, United is certainly exposed to recession risk. Their huge aircraft orders might be deferred at some cost, but come with significant capital expense. In the past Southwest and then Delta had the strongest balance sheets. United is not in the same financial position that Delta is. While they’re stronger than they were in 2020, they built a plan for significant growth – and international exposure.
I don’t put much stake in his claim that United will stick to its growth plan in the event of an economic contraction which leads to a downturn in air travel.
[A]s we now head into what may be a difficult economic environment, we’re in a position to keep our plan, to keep focused on United Next, to keep growing, to continue hiring people, really to stay the course, while the rest of our competitors are the ones, in this case, that are having to start shrinking.
Almost across the board, those airlines on that previous chart are starting to shrink. Almost across the board, they’ve stopped hiring or many of them have already started to furlough employees.
What sets United apart?
- Increasingly it is not MileagePlus. They’ve been devaluing their miles consistently over the past four years. There are too many elites for the benefits that they can deliver.
- It’s not the on board product. They’re bringing it up to par. The business class seat is good enough, but not a differentiator, bedding is very good but the rest of the soft product isn’t. Their domestic product is adding seat back screens and better wifi, to become competitive with Delta and JetBlue.
- It’s not service. Alaska, Southwest, and Delta are all generally friendlier than United crews, although there are some great crews and generally better than they were in the Smisek days (Oscar Munoz really did contribute here).
- They do have better technology that leads to good customer experience – a better mobile app, better automated communication with customers during delays, and better ability to hold plans for connecting passengers when doing so won’t cause delayed arrivals for everyone else (“ConnectionSaver”).
- Ultimately it’s their network – upgauging domestically, and transporting passengers Globally. United is part of the largest global alliance and will take you more places around the world than other U.S. airlines.
United is a better airline than it was a decade ago, with a frequent flyer program that isn’t as good as it was a decade ago. They have a clearer strategy – it’s one that can certainly win, but it’s not without risk. It assumes continued growth in air travel in the United States and from the United States to the world. But the question remains whether the world will remain on a trajectory of ‘up and to the right’ or whether United can improve financially fast enough to weather disruptions in that graph along the way.
