United Airlines CEO Scott Kirby reported at the Wolfe Research conference on Tuesday that leisure demand is back over 100% of pre-pandemic levels, and business travel is going to fully recover too. He’s seen a spike in people using MileagePlus credit cards. And United will win customers with technology, soft product, and lower costs rather than investing in hard product.
In fact, Kirby even argues that United has a financial advantage competing against low cost carriers (like Spirit Airlines, Frontier and new entrants like Avelo).
Business Travel Will Recover And Exceed Pre-Pandemic Levels
Business travel is coming back at United, from down 80% to down 75%. Kirby expects business demand will recover, and those who disagree are just wrong. One “inflection point” already was the change in mask guidance for vaccinated individuals by the CDC. However the airline expects a big ramp up in business traffic come September.
- Even tech companies will return to the office. However there may be a hybrid work model. Kirby sees people working in the office half the time, and that one “incremental source of business travel” is “people who trade their daily two hour commute by car for a monthly commute by airplane.” However I’d note that people being in the office only half the time means less of an opportunity to travel to their office to meet with them – that footprint declines by 50% as well.
- Kirby also believes that “once you go back on a business trip, your desire to do more escalates significantly…once you get somebody to do their first trip they’re ready to go on their 2nd, 3rd, 4th trip.” He thinks business travel is “about human nature” and that Zoom doesn’t replace in-person meetings at conferences and over dinner where you get to know someone.
- He’ll “probably be in the office tower a week a month, on the road a week a month, and with the family half the time” amount to “more air miles” than he was doing before even as his work balance has changed in a lasting way from the pandemic. While people value work from home, he’s taken his 7 year old on two business trips with him.
People Are Highly Engaged In MileagePlus Right Now
Kirby talked about the success of their co-brand credit cards, noting that Chase has shared publicly that there’s been a “6% increase in last few weeks in airline travel credit card spend” (not necessarily spend on United products “but we’re their biggest portfolio”). On the first day of their travel sweepstakes for vaccinated customers over 100,000 new people joined MileagePlus and 200,000 people uploaded their CDC cards.
Airline Soft Product Matters More Than Hard Product
Kirby was asked what one thing he used to believe but he’s changed his mind about. He offered that it’s that “air travel was commoditized,” and that customers only buy on schedule and price. He then acknowledged that “was more true” at America West and US Airways where he worked, and “those are still two of the most important factors” in customers choosing an airline, but he’s “increasingly convinced that air travel doesn’t have to be a commodity, that there are people that choose and people that care and the things you do for customers that make them want to fly your airline.”
He offered that it’s “not the hard product as much as all the things you do to change how customers feel when they fly.” Then he suggested this isn’t actually new, that he “thought that before but that has been proven to me during the pandemic.”
No one has been more known for cost-cutting than Kirby so it’s not surprising to hear he doesn’t believe hard product investment is a top driver of customer behavior. However he’s absolutely right that small touches like United’s ConnectionSaver which holds planes for late-arriving passengers can make all the difference in customer loyalty. Ultimately people just want to be treated like human beings, not self-loading cargo.
Government Subsidies For Airlines Prevented Important Disruption In The Airline Industry
United Airlines was ready to survive the pandemic even if the second and third airline bailouts didn’t pass, Scott Kirby says, but other airlines (presumably he means American Airlines here) were not.
And he says that “capacity-focused decisions didn’t happen because of PSP.” Airlines kept flying the way they always have rather than engaging in real change in their operation, which Kirby claims United is doing anyway. The ‘payroll support’ airline bailouts, in Kirby’s estimation, kept airlines from having to make many of the hard changes they’d have been faced with, and did too much to maintain the status quo.
United Will Consistently Drive Down Costs And Beat Low Cost Carriers
Analyst Hunter Keay got Kirby to confirm that the airline would be offering “a consistent cost story over the coming years,” that United will drive lower costs and “greater efficiency” from front line employees. The airline’s fixed overhead expenses will be lower, and “total labor expense will be lower even as pay rates go up, because we’ve done so much with technology to be productive.”
‘Greater labor productivity’ was a theme of the day at the conference with American offering that they’re moving to single agent boarding at gates, meaning fewer employees needed per flight or unit of capacity than before.
Kirby offered an interesting take on United’s financial advantage over low cost carriers. He suggest that for large narrobody aircraft they have a cost per available seat mile (“CASM”) that’s under 6 cents.
- They spend less buying planes than an ultra low cost carrier
- They all pay the same for landing fees and fuel
- United actually spends less per united of maintenance but that’s not always obvious because low cost carriers often capitalize maintenance costs.
So, he says, “as long as we don’t let management fixed headcount grow” – which he says they won’t – “the only difference in CASM is the number of seats you cram on the airplane.”
Ultra low cost carriers generate low costs per mile flown by increasing their denominator (number of seats) but United “generate[s a revenue per available seat mile] premium higher than the CASM differential.” In Kirby’s telling, United is “the low cost producer of aircraft in our hubs and we generate the highest RASM.”
Kirby Thinks United Will Benefit From Inflation
Earlier in the conference Delta’s President ranked inflation concerns as a 5 on a scale of 1-10, something that might cause issues for his contractors (because of wage pressures) but not as big an issue for Delta directly. Scott Kirby ranked it a 1, despite declaring “I think we’re gonna have inflation.”
Kirby isn’t concerned about inflation because “it’s going to partially be airfare,” and that “we’ll more than pass it on” to customers. In other words, he’s not worried about inflation because it’ll mean higher airfares that more than cover higher costs, and that he believes his margins will go up.