United Airlines is ready for a return to normal, but its CEO says the global aviation system isn’t.
The Chicago-based carrier said Thursday that persistent strong demand enabled the highest second-quarter revenue in its history. But the airline and its CEO also warned that the rest of the year is filled with risks that include high fuel prices, a potential recession and operational challenges.
“We’re not going to get back to normal utilization and normal staffing levels until next summer,” CEO Scott Kirby said Wednesday on CNBC. “The system just can’t support our flying. We’re going to be a smaller airline because the system cannot support it.”
United will cut current-quarter capacity by 11% from the 2019 third-quarter level, the carrier said in a filing. Kirby said that means capacity will remain close to where it is now. “The reason we’re pulling down the schedule [is] to do better by the customer,” he said.
On the United earnings call Thursday, Kirby said: “Capacity for us and everyone else in the industry is not so much about flying to maximize next quarter’s profit or margin. It’s about the physical constraints of being able to fly.
“The whole system is strained,” he said. "There’s tight staffing everywhere. It’s not unique to flying.”
Even when the weather is good, Kirby said, “sometimes the jet bridge breaks (or) the power goes out for 20 minutes… That’s why we pulled the schedule down – to create more buffer, more resiliency for our customers.”
Additionally, Kirby said, United will pull 200 daily flights from its Newark schedule “for a few weeks in September” due to runway construction. Newark Airport has long been the most delayed airport in the country, due largely to air space congestion. “That airport has already got ten pounds in a five-pound bag,” Kirby said.
United said operating results, “with the exception of Newark,” were largely in line with 2019 results. This month, the carrier cut summer capacity at Newark by 12% from what it had planned in an effort to enable smoother operations.
Despite lower capacity, chief commercial officer Andrew Nocella said United is pleased with booking and revenue trends.
“It appears to us that airline industry revenues are rapidly returning to 2019,” Nocella said on the call. “We will have higher costs, higher fuel (and) lower capacity, but most importantly higher revenue.” He said international passenger revenue per available seat mile is “spooling up,” and business travel appears to be returning, which will lead to higher yields.
Nocella said United’s capacity reduction reflects a decline in the number of aircraft it is flying as well as lower utilization. In particular, less flying in Asia means that United is using larger aircraft on shorter domestic routes. That means fewer available seat miles as well as higher costs per available seat mile.
“Certain parts of the Asian network have not come back, and we don’t believe they will be coming back in the near future,” he said.
In discussing commercial aviation’s second-quarter failings, on CNBC, Kirby focused on London's Heathrow Airport.
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“Look at the mess that’s happening at Heathrow,” he said. “We’re being forced to cancel flights because Heathrow can’t accommodate them.”
At one point, the airport told United it had to cancel three flights scheduled for the next day.
“This is frustrating to us,” Kirby said. “We told Heathrow how many passengers we’re going to have. Heathrow basically told us, ‘You guys are smoking something.’”
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For the current quarter, aside from the overall 11% capacity reduction, United also sees an 11% revenue decline in the current quarter as well as a 16% to 17% increase in cost per operating mile, even before the higher cost of fuel is factored in, according to a filing with the Securities & Exchange Commission.
"It's nice to return to profitability – but we must confront three risks that could grow over the next 6-18 months,” Kirby said in a prepared statement that accompanied the earnings report. “Industry-wide operational challenges that limit the system's capacity, record fuel prices and the increasing possibility of a global recession are each real challenges that we are already addressing.”
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“We’re in the sixth or seventh inning of COVID recovery,” he added, noting that both business travel and international travel are showing signs of recovery.
In the second quarter, United revenue was $12.1 billion, up 6% from the same quarter in 2019. Adjusted net income was $471 million. Adjusted earnings per share were $1.43, well below the consensus estimate of $1.95. Kirby said the miss was due primarily to higher fuel prices. Cowen analyst Helane Becker said in a research note that costs were $283 million higher than she forecast. Total revenue per available seat mile was 24% higher than it was in the same quarter of 2019, but cost per available seat mile, or CASM, was 32% higher. CASM excluding fuel was up 17%.
While domestic revenue was up 9.3% to $7.15 billion, international revenue was $2.67 billion, down 6.7% as a result of a 62% decline to $428 million in the Pacific.
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“The company achieved the highest second quarter revenue in its history, delivering its first profitable quarter since COVID-19 began, despite record-high fuel prices,” United said in its earnings release. “The second quarter results combined with continued progress the company is seeing affirms United's confidence in achieving the long-term adjusted pre-tax margin targets of approximately 9% in 2023 and about 14% in 2026.”
“While the company anticipates the economy will slow in the near to medium term, the continuing pandemic recovery is more than offsetting economic headwinds — leading to expected revenue and earnings acceleration in the third quarter,” United said. “As a result, the company continues to expect to be profitable for the full year 2022.”
