United Airlines' strong financial performance demonstrates how US airlines are overcoming issues caused by severe weather and the 737 Max grounding
- United announced its best-ever second-quarter revenue during an earnings call on Wednesday, and increased projections for the rest of the year.
- The growth came in spite of several challenges the airline has faced this year, including severe weather, suspended routes, and the grounding of its 737 Max fleet.
- Increased demand has given the airline more pricing power, and helped it overcome "headwinds" caused by those various issues.
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United Airlines held its second-quarter earnings call today, reporting a strong financial and operational performance in spite of facing numerous hurdles and setbacks.
The airline hit its highest-ever second quarter pre-tax income - $1.1 billion - and raised its 2019 profit forecast with the expectation of $10.50 per share, up from the previous forecast of $10.The results are notable considering the challenges United faced over the past three months.
Severe weather incidents caused major delays and cancellations for all airlines over the past quarter, with United seeing a 17% increase in air traffic control-mandated weather delays from the same period last year.
The airline has also been forced to cancel its daily flights from Newark-Liberty International Airport near New York City to New Delhi and Mumbai, India, due to a closure of Pakistani airspace to global commercial traffic following heightened tensions between the two countries nearly five months ago (Pakistan announced this week that it is reopening its airspace, and United announced that flights will resume September 6).
The biggest thorn in United's side
Most prolifically, though, is the global grounding of the Boeing 737 Max jet. United has 14 of the jets and has been forced to cancel flights since its grounding in March. The airline was supposed to receive an additional 16 ordered jets throughout 2019, forcing it to cancel additional flights through at least November - the carrier announced last week that it expects to cancel 2,100 flights in September and 2,900 in October.However, none of these factors were enough to prevent United's revenue growth.
"We faced headwinds, but we don't make excuses," said United president Scott Kirby on the call. "We're simply buckling down and overcoming those headwinds."
Beyond that, the airline has actively sought out new expansion opportunities. It's recently purchased 19 used Boeing 737-700 aircraft with delivery coming in January, and taken possession of several used Airbus A319s. Chief Financial Officer Gerry Laderman said that the airline got them at a solid price.
"Opportunistic purchases of used aircraft will remain a key part of our fleet strategy," he said. The purchase "saved hundreds of millions of dollars over the expense of new airplanes."
The airline is also making a play for more revenue from premium seats - its premium seat Available Seat Miles, or ASMs, have increased 2% year over year, but are expected to rise 8% by year's end.
The airline is seeing high enough demand to outfit several Boeing 767s with a special premium-heavy configuration, with 46 seats in business class, 22 in premium economy, and 99 in economy. The usual 767s have just 30 business class seats. That plane is available on flights from Chicago and Newark to London, and will begin flying to Switzerland next year.
The airline is also introducing a "new" aircraft called the CRJ-550. In reality, it's a CRJ-700 aircraft, usually configured with 70 seats, but designed to fit just 50 in a premium-heavy layout: 10 seats in first class, 20 with extra legroom, and 20 in regular economy (the introduction of the "new" plane with fewer seats is also a way for United to get around certain aircraft restrictions imposed by labor agreements). The aircraft is set to be introduced this summer.
Ultimately, though, it isn't just higher premium demand that's driving profits; it's higher demand overall in the US market. The airline has seen 11% more first-time flyers than last year (Chief Commercial Officer Andrew Nocella characterized this as a "notable" increase), driven in part by its corporate sales team, and part by loyalty promotions. Nocella also noted an increase in engaged customers, defined as those with a certain annual travel spend with the airline, those who hold co-branded credit cards, and those with United elite frequent flyer status.
The airline has also added 34 new routes this quarter, notable considering the 737 Max grounding, suggesting that demand is indeed surging. Given the higher demand and the limitations on seat availability due to the Max, United finds itself in a beneficial situation - even though budget-minded passengers might not be thrilled. The airline has higher pricing power, and expects that through the rest of the year: it's predicting a 2.5% increase in passenger revenue for every seat mile flown through Q3.
While the 737 Max situation continues to develop, the increased revenue and projections means good news for investors - although their response seemed to be measured. United's stock closed at $94.78 on Wednesday, up just less than one percent.