I’m genuinely struck by the shift in United Airlines CEO Scott Kirby since taking the reins at that airline. He was President of US Airways and American Airlines under Doug Parker, and known as a straight spreadsheet guy. At US Airways he wouldn’t even add inflight wifi until he could actually see customers booking away from the airline because they didn’t have it.
United is still careful with cost, and their new premium image often outstrips the reality of the product and experience, but they make investments in customer experience others aren’t making and take risks for payoffs that will be harder to quantify. And it’s working out for the airline.
During the airline’s third quarter earnings call, Scott Kirby began the call attributing their earnings beat to working hard “to improve the customer experience.” That’s his explanation for what’s different at the airline that’s leading to strong financial results. He flags a multiyear effort at “significant product investments that are important to our customers.” The is the same executive who tried to charge for water and eliminate elite bonus miles at US Airways.
During the call, Kirby described the plan to fly to Nuuk, Greenland as being low risk – “only two 737s per week” – but with big upside for “our brand and our customer profile and sign-ups for MileagePlus” [and therefore the credit card]. These are elements he might not have considered, or spoken to, ten years ago.
I actually asked whether Kirby had reversed course on his history running airlines as far back as 2018, but it was a long history and so it took a lot of convincing. I normally anchor strongly to ‘the best predictor of future behavior is past behavior’ and believe that mean regression is an underrated predictive tool.
Kirby was first among legacy airline leaders to scrap most change fees and claimed to always be a big fan of seat back entertainment screens. I didn’t believe him. And I believe I owe him a public apology for that.
Perennially Troubled United Becomes A Better Airline By Focusing On The Right Things
I always assumed that as an ex-America West executive Kirby was cut in the Bill Franke mold and that the destruction of shareholder, customer, and employee value at American would be a reasonable predictor of Kirby’s results at United rather than something to attribute solely to the rest of the leadership team there. He’s explained otherwise – suggesting that sitting in the CEO seat is different – but I was skeptical. And at this stage it’s looking like I was wrong.
- United has a respectable business class product, decent lounges, and the best mobile app in the industry. (Note, though, that the business seat and lounge product were signed off on two CEOs ago.)
- Their ConnectionSaver technology actually helps passengers avoid getting stranded, and they pointed out on the call that no airline has yet copied this. Their coach seats are uniquely hard and uncomfortable in my experience, but they’re actually installing seat back screens in a 180 from their earlier approach. And they’ll eventually go from industry worst wifi to best with Starlink.
- MileagePlus has been on the value decline for several years, even as they look to mine it for additional advertising revenue, but their access to Star Alliance partner inventory makes the chances of business class to Europe better with MileagePlus than other U.S. airline programs. (That doesn’t give them the best program overall in the U.S., which probably goes to Alaska, or in North America which may be partner Aeroplan.)
This is a far cry than the United I knew for so many years, that under Jeff Smisek embarked on a multi-billion dollar cost-cutting initiative given the 1984 ‘Newspeak’-style name “Project Quality” which involved elimination of ketchup from Europe flights and garlic bread from premium cabins to Asia.
It’s Elites Driving The Revenue, And Basic Economy Filling The Seats
United reports that all of its hubs are profitable and all of its regions are profitable (this is rare in the industry, and not true for major competitors). MileagePlus revenue is up 11% year-over-year, membership is up 13%, and co-brand card spend up 9%.
According to Chief Commercial Officer Andrew Nocella, revenue from MileagePlus elite members during the third quarter “was up 9% and that drove the majority of revenue growth at the airline.”
At the same time, United Airlines appears to be doing a good job of segmenting customers, which isn’t so great for customers. They say their basic economy volumes are up 21%.
They are flying bigger planes, which gives them more seats to sell, and they’re filling those seats not by lowering fares on business travelers and premium leisure travelers but by selling cheaply to price-sensitive customers using the most punitive basic economy product in the industry.
Delta Makes Excuses While United Doesn’t?
CFO Mike Leskinen threw serious shade as Delta’s excuses about CrowdStrike, days after that airline’s results missed analyst expectations. In response to a question about why United didn’t mention CrowdStrike despite thousands of flight cancellations,
[H]ealthy businesses, healthy industrials..they’ll make excuses about CrowdStrike, they’ll make excuses about weather. We build it into our guidance, the expectation that there will be one act of God in a quarter that impacts the business in a negative way. And if that impact ends up not being so large then we can beat – coming at the high end or beat our guidance. If you have a series of events in a quarter or a massive event, then of course, you’re not always going to hit your guidance. But I think it’s just basic setting of targets in a way that expects it not always to be a perfectly sunny day.
Scott Kirby followed up talking abut his ‘No Excuses’ philosophy coming out of his time as a cadet at the Air Force Academy.
Return To Stock Buybacks
I can’t move on from the announcement of $1.5 billion in stock buybacks, something that I predicted a month ago.
I would personally prefer to see more debt repayment first, but United management is confident that the free cash generation from their business isn’t ephemeral. If they’re right, then timing won’t matter, and indeed buying back shares now may be advantageous from a price standpoint (they can retire more shares with the same amount of money). That may not end up correct – shares are already back close to pre-pandemic levels – but it’s also not crazy.
And if they believe that they have more cash available than productive uses for that cash, returning it to shareholders is precisely what they should be doing.
- That’s good stewardship of the resources, and the markets will trust you with capital in the future.
- It’s good for the economy, because it frees up cash to be invested more productively elsewhere.
- It isn’t shareholders raiding the company as some like to claim. It is already their money!
I will never understand commentators who think that a company’s share count should only ever increase… Flight attendants union head Sara Nelson declares, “That money United just promised Wall Street belongs to Flight Attendants” but… United’s business forecasts already assume paying flight attendants more! One has nothing to do with the other. In any case,
- It was only two weeks ago that United flight attendants even specified wage demands as part of their bargaining, and only then at the insistence of federal mediators.
- The AFA-CWA union pursued a strategy of pushing American Airlines flight attendant negotiations first. American’s cabin crew are represented by a different union, but AFA-CWA lent their lead negotiator to focus on that other deal. It put American’s flight attendants in jeopardy of having to strike, and created a higher wage floor to negotiate the United deal off of. It’s disingenuous to lay the slow march to a contract at the feet of United management.
They’re making $6.5 billion in capital expenditures for the year and over $7 billion next year (they’ve guided to a $7 to $9 billion range, but Boeing delays mean it should be closer to the lower end of the range). $1.5 billion in share buybacks over 5 quarters isn’t outsized, or at the expense of investing in the business.
I think there’s a lot of risk in their fleet plan, and in rising labor costs. The economy may not keep up with United’s growth plans. I would still prefer de-risking the balance sheet first. But they have a view of the world, and a bet for the business, which isn’t something that can clearly be said for all of their competitors.
Kirby knew first hand what wasn’t working at AA and let’s face it, the US operating model was never really one to emulate. It is remarkable how he has been able to turn United around, though United giving off “premium” vibes is a bit of a stretch. UA runs, arguably better today than it ever has. The lounges have been improved significantly, and there is some meaningful investment in the on board product nose to tail, but helps UA join DL in leaving the rest of the industry, and specifically, AA behind, at least for now.
Waiting for know it all Tim Dunn to tell us this is all wrong.
“No excuses” is a good philosophy. What’s his excuse for breaking his agreement with people who paid cash for lifetime United Club memberships? We paid for anytime access, not just when flying his airline.
Er, oil refinery, er A300-900 fuel economy, erm Amex cc deal, um Pacific revenue premium. – Dunce
Keep coping.
@David and John
FFS let it go. Not only are you not ignoring him(the correct approach), you are here first to troll. At this point you are more pathetic than him.
What’s his excuse for the MileagePlus no-notice devaluations? Has he reinstated employee bonuses that he killed off in favor of a lottery? How about reinstating wine flights? He’s still a soulless bean counter although a smart one.
People often change (for the better) when they start raising a family with several kids. Their focus on profit gets mitigated by newly acquired family perspectives.
Scott Kirby is now working for his 4th airline and is a fairly young guy. Anyone w/ a modicum of intelligence can figure out what works and what doesn’t. And since Kirby arrogantly thinks he is the only one that reads every airlines’ financial statements and listens to their earnings call, he should all the more figure out how to copy the best airlines.
And from the first day that Kirby took over at UA, his goal has been to match DL’s earnings… he has done a herculean job of turning UA around by fixing the things that were broken. He has stated over and over that UA has learned from and is copying many of DL’s strategies.
But let’s also be clear that UA, despite 7 years, has not caught up to DL in terms of profitability as well as most other customer service and financial metrics. UA exceeded DL’s profitability on an OPERATING income basis for the 3rd quarter but did not on a net income basis; try not paying your interest expense on your mortgage or car payment and let us know how it goes.
and UA has not completely turned around employee relations. The FAs at AA, WN and DL have all received pay raises and UA didn’t hesitate to give its pilots pay raises but Kirby is happy to drag the process out with the FAs.
as for excuses about CrowdStrike, UA cancelled 2.5% of flights in Jul while DL cxld 4.2% and DL still has fewer cxld flights than UA (and AA) year to date and the best on-time of the big 4.
Kirby and co. love to talk about how they include one major disruption per quarter as part of their forecast but what the data shows is that UA simply runs a less reliable operation than DL (and at least on cancellations than WN) all of the other days of the year.
And UA will not exceed DL’s profits on an annual basis, even if the AFA fails to play hardball as the APFA did with AA. If the AFA really does its job, a settlement wiht the AFA will cost UA hundreds of millions of dollars more in labor costs each year plus a half billion or more in retro.
Kirby has fostered a mindset of arrogance at UA that is a combination of Kirby’s need to prove himself at his fourth airline and the natural arrogance that has been part of UA’s culture long before Kirby showed up.
And, UA also will hugely fail at the fleet expansion plan that Kirby laid out with the massive MAX and 787 orders that UA placed during the past few years. In contrast, DL will get more than 2X more new widebodies from Airbus that the entire rest of the US industry will receive from Boeing. And DL might very well receive more total aircraft than United will in 2024 depending on how quickly Boeing recovers from the strike – which might be in the settlement phase.
Kirby and co. love to tout their own greatness but manage to repeatedly deliver on the goals they set while trashing everyone else
United has one of the best route networks in the country. With only one hub in a red state, all United hubs except Houston are in the Top 30 GDP per capita in the country. With SFO, WAS and NYC being in the Top 10 GDPs per capita, United is uniquely positioned to invest in products and provide value that customers are not just willing to pay for, but also can pay for, because frankly their customer base can afford to.
Compare to say American that has to carry their largest hub which is not even in a Top 30 market, not to mention other low productivity areas like CLT, PHX, and MIA.
It makes sense that Kirby has changed his tune, and admittedly quite a bit, now that he’s at an airline that has a customer base capable of spending more money. The US Airways philosophy regarding WiFi might have made sense in low GDP PHX, but will not fly in SFO, LAX or NYC where people have money and are willing to pay for a better experience.
Good analysis. Just one note of correction – the Seeking Alpha transcript (and Brian Sumers) are incorrect in that block quote. Leskin actually says a healthy company offers *NO* excuses. Huge missing word.
Financials aside, I must say that I’ve enjoyed domestic F flying on United more so than with any other domestic airline post pandemic. Surprisingly great service from FAs have been the biggest change for me.
Gary glossed over that MileagePlus devals have ruined its value proposition, so UA miles are not a reason to fly the airline, or put spend on their Chase cards unless it’s heavily bonused by 3-4x. Availability and ability to refund awards is good, but good luck finding even a 1 cent per mile value.
I have no dog in the UA/DL argument but it’s amusing to see Tim Dunn refer to Kirby as arrogant given that Ed Bastian’s recent remarks would seem to give him very high ranking on the airline arrogance registry.
Anyone else notice the irony of Humble Tim complaining about Kirby’s arrogance and Never-a-Troll Tim complaining about United “trashing everyone else”?
Tim – the last seven years don’t matter. The next seven years do. Who has the momentum?