United CEO slams low-cost airlines as carrier grows basic economy

United Airlines CEO Scott Kirby offered a bleak outlook for ultra-low-cost carriers — which have been struggling with sluggish domestic travel demand — during a call with analysts Wednesday morning.

"We also expected and now believe it'll happen even faster, that the domestic market is going to see a shakeout," he said during the call.

Kirby's comments on the Wednesday earnings call followed a LinkedIn post Tuesday, where he said ultra-low-cost carriers will be "forced to make adjustments."

"What's different this time, however, is that the lowest margin airlines are the so-called low-cost carriers, and that's where I think the changes are going to occur," Kirby wrote on LinkedIn. "As a result, United is going to emerge in a structurally stronger and sustainable position."

While travel has boomed since pandemic-related restrictions were lifted, demand has begun to soften, hitting ultra-low-cost carriers the hardest. Ultra-low-cost carriers offer a bare-bones short-haul service to primarily leisure destinations with no premium products. That's now costing them customers who are opting to splurge on more expensive long-haul flights and premium products.

As a result, airlines are expecting a rougher fourth quarter and start to 2024, with an outsize impact expected for the major ultra-low-cost carriers like Spirit Airlines, Frontier Airlines and Allegiant Airlines. Spirit and Frontier also told investors at a conference last month that they are forecasting significant losses for the third quarter.

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"There are only so many seats Florida, Cancun or Vegas can support in such a short period of time," Andrew Nocella, United's chief commercial officer, said on the call.

Ultra-low-cost carriers have also been squeezed by rising fuel and labor costs, putting further pressure on the ultra-low-cost carrier business model that doesn't generate revenue through premium cabins or lounges.

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This isn't the first time Kirby has criticized the ultra-low-cost carrier business model. In 2019, Kirby said the business model is one the carriers "are not in control of" at the Skift Forum Asia.

Kirby's remarks come as United plans to grow its basic economy class, hoping to further sway travelers away from its ultra-low-cost competitors. United saw major gains in its basic economy offerings as third-quarter revenue for the seat class rose by 50% from the same period last year.

The Chicago-based carrier is betting that the travelers who fly with ultra-low-cost carriers will instead flock to United for its low fares and premium products.

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Nocella said on the earnings call that basic economy comprises 12% of United's domestic passengers and is expected to be even more competitive in the market following the arrival of larger aircraft, which will allow United to add more basic economy seating.

Kirby also took a swipe at Frontier, referencing the carrier's policy that cracked down on passengers trying to take a carry-on-size bag as a personal item in order to avoid paying the ancillary fees.

"I mean charging people $99 at the gate and paying your employees a commission to take their purses away crossed the line," Kirby said. "And so while they've gone in one direction, we've gone the other with an improved product."

The decision to expand basic economy is also part of United's strategy to offer a wide array of products to remain competitive in the industry.

"All the way from basic economy, which just allows us to compete profitably on price on the low end," Kirby said, "and all the way up to Polaris on long-haul international, United is able to give our customers the real choice they want."

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