United Airlines loves to do a scene.
Last week, the airline placed an order with Boeing for 100 787 wide-body aircraft with another 100 options, and exercised options to purchase more narrow-body 737 MAXs while placing new orders for more MAX aircraft.
United says it is the largest wide-body jet order ever placed by a US airline, and will help it execute on its renewal and fleet expansion plans over the next decade.
United and Boeing have teamed up to host a major event at the planemaker’s Dreamliner assembly plant in Charleston, South Carolina, to mark the signing of the order, with an appearance by the CEO. Boeing Dave Calhoun, Boeing Commercial Aircraft CEO Stan Deal, most of the C-suite – including CEO Scott Kirby – and South Carolina Governor Henry McMaster.
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But beneath the glitzy fame lies a high-stakes dynamic as United outlines its strategy for the mid-2030s, a gamble with huge upside potential, but also a risky gamble. high risk and cost.
Such events, and the use of a “historic” monumental announcement to map out a business plan, have become the standard MO at United, largely for its sake as it dominates. aviation headlines in recent years.
For example, last year, even as the airline industry was still struggling to make a profit from the pandemic low, United hosted a buzzing event at the hub of Newark Liberty International Airport (EWR). to announce its “United Next” plan, a roadmap to reconfigure the carrier’s capacity and fleet, which includes an order for 270 narrow-body jets, the largest order ever from by an American airline.
This week’s event has nothing to do with cabin or new product unveilings, but still sees the airline thrive with a massive push in media and marketing, even hiring one of its own. its own 737 MAX 8 planes to carry an army of influencers – employees from workgroups throughout the airline who use their personal social media accounts to promote the airline airline, with tacit guidance from the owner — to Charleston to share photos and videos. Meanwhile, the assembly line in Charleston paused briefly as employees left their stations to wear matching blue T-shirts and sit in the plane maker’s giant hangar.
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While the United CEO clearly enjoys being seen as an industry leader and loves making headlines – as aviation journalist Brian Sumers wrote in an article. recent newsKirby will either be remembered as “one of the three most transcendent American aviation executives in modern memory” or “one of the all-time losers… Officer Josh Earnest’s team has unparalleled ability to capture the news cycle and online virality, this time there’s really something there.
If the first Sumers scenario comes true, it will be because Kirby has led the airline through the COVID-19 pandemic and turbulence in the years that followed with incredible foresight.
When United ordered the narrow body, travel demand has dropped again but is still far from recovering. United are still deep in the pit and have no clear path to cash flow to support any short-term capital investments. The idea of retrofitting its existing fleet with a new interior seems like a myth.
But 18 months later, the move looks good.
Runway and other infrastructure constraints at major airports — and where are the effective limits on location at its Newark hub — place limits on the number of flights airlines can take. exploitable. Part of United’s strategy is to “upgrade” the aircraft on many smaller routes to combine frequencies – in other words, fly a twice-daily route with a 100-seat aircraft instead of operating operate it four times a day with a 50-seater. airplane, saving two seats for take-off and landing.
Meanwhile, continued supply chain constraints are likely to persist for some time across the entire global economy. With orders already in place and delivery slots secured, United has a degree of relative certainty over its new aircraft, assuming that Boeing can stabilize its production pace. It also locks in pricing terms during periods of high inflation.
United thinks supply chain problems are something that will be solved in the long run. Kirby told reporters Tuesday at an agreement-signing event at Boeing’s Charleston plant that the project to retrofit its cabins has been slower than expected, but is still expected to be completed. largely completed by the middle of the decade.
“So far not much has been done,” Kirby said. “It’s on the right track, if it’s not 100% done by 2025, it’s going to be basically done by 2025.”
“There are already several supply chains [issues]but we’ve mostly wrestled with those people on the ground.”
Notably, this is the first time United has suggested the project could slip after 2025.
It is too early to say whether the order will prove to be the right decision in the long run and it is too early to see how the wide body order will hold up.
But at first, it seemed like a smart move.
International travel demand has picked up again, says Kirby, and there’s no reason to expect it to decline. Long-distance travel also offers United an opportunity for growth that it cannot replicate in the domestic market. Airline executives often point to their 2020 decision not to retire any wide-body fleet as it allows the airline to capture the need to come back two years later and come back again. initiative to build a global route.
“It’s really just the next logical step on the journey that United have been on since the start of the pandemic,” Kirby told reporters at the event in Charleston this week. “United has positioned itself on the other side of the pandemic in a completely unique way.”
Kirby also said that the airline chose to place such a large order to try to capture the opportunities created by the pandemic – after all, before the pandemic, an order of just 50 jets wide body would be considered a big problem.
Kirby told reporters: “The reason we’ve grown so big is that, first, we’re strong and we have a unique place in our international development hubs and I think international will really strong in the years to come.”
Kirby added: “Structural changes that have occurred during the COVID era mean that it will be a long time before many of our competitors are able to thrive again, or even return to their position. them in 2019”. “We start off with a good start, and we’ll run even harder.”
United has grown ambitiously since international borders began to reopen following the 2020 lockdown, trying new and unexpected destinations like Ghana, Jordan and Malaga, Spain.
Notably, the 787s average about 25% better fuel economy per seat than United’s current international fleet, which gives more incentive to replace older jets.
Aircraft are expensive, though, and United’s commitment to 100 new widebody planes is a big one.
At list prices, the order would be worth about $30 billion, depending on how many of each variant United handles. While airlines never pay full price for new planes and United have received favorable terms – “I’m laughing, that’s all I’ll say about the price,” Kirby laughs as he pays. answered a reporter’s question in Charleston – that’s a lot of money, however, for a company that already has hundreds of planes on order. For reference, United has ended third quarter of this year reported a profit of $942 million on sales of $12.9 billion, with $20.4 billion in current assets.
However, speaking at Tuesday’s event in Charleston, chief financial officer Gerry Laderman said the airline expects no problems.
“The planes you build are profitable machines,” he said. “We’re going to make a lot of money with these planes, the more the merrier, I think.”
During his pre-event press conference on Monday, Laderman indicated that the airline was expected to pay for the aircraft from upcoming revenue, but said it could choose to fund some “of the range we find capital markets funding attractive.”
“We have the luxury of making that choice,” he added.
What will ultimately make or break United is demand. If Kirby and the airline are right and international demand remains strong, it will approach the 2030s with a wide-body fleet at least as large as it is today – with 100 additional planes that United could choose to buy if available. “opportunity” to expand into new areas. routes or markets arise, as Laderman said in Monday’s pre-event press conference.
But if travel demand declines or starts to look different – perhaps renewing the trend towards larger jets or prioritizing international travel – or if plans to upgrade routes and reduce frequency of endings fails, then United will have difficulty finding a solution. What to do and how to pay for 700 arriving planes.
