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UNITED SHIFTS AIRCRAFT DELIVERY DATES
United may never take delivery of its A350s but the 737 MAX is coming on property faster
As part of the news released around United’s earnings call, it was announced that the delivery of United’s first four A350-1000s (it has 35 on order) would be pushed out of 2018 while 12 737 MAX 9 deliveries would be pulled forward into 2019.
The duality of these two moves is interesting, in that they push up against each other from a capital expenditure perspective in 2019. At this point, we are skeptical that United will ever take delivery of the A350-1000 order (our view is that it will likely convert them to the A350-900 or cancel the order outright with the former being slightly more likely).
The 737 MAX meanwhile, can’t get here fast enough for United. But at least initially it won’t play much of a role as a 757 replacement on trans-Atlantic missions. As United’s Andrew Nocella outlines:
Yeah. I think right now, Mike, we have plenty of 757s in our European configuration that are flying around in the domestic system. So I don’t think we have any rush to move into flying 737s across the Atlantic. But it’s something we’re going to look at for the medium to long term. But it’s not something we plan to do in the short term at all.
UNITED AND FRONTIER CLASH IN DENVER
The evolution of United’s Denver hub over the past 4-5 years has been fascinating. During the Smisek era, United was focused on international growth and so Denver as a primarily domestic hub was a bit of a red-headed stepchild.
In contrast over the last couple of years, United has increasingly seen Denver as a profit center. In today’s era of currency weakness and international over expansion, being a solely domestic hub is actually a plus.
This makes Frontier Airlines’ expansion announced earlier this week particularly troublesome for United, as Frontier will be adding service to close to 20 new nonstop destinations from Denver, encroaching on United’s turf. In response, United President Scott Kirby did not mince his words:
Sure, thanks Hunter. In the near to medium term, anytime we have capacity growth from anyone but particular a low cost carrier it’s going to lead to some pricing pressure. Over the longer term however I view this really having watched the ULCC growth over the last decade this is the best news that I’ve heard in the last ten years. I have known and look, what they said is, they’re going to run a connecting hub-and-spoke network in Denver. The model that they used to have which led them to bankruptcy, but they’re pivoting from what has been the most successful models, point to point ULCC strategy around the world to going back to trying to copy what the network carriers do and run it connecting business model.
And the reason I view that is that best thing that has happened in the last decade is because I believe for many years that the ULCC business model can’t work when a network carrier decides to compete on price and particularly once we’ve been able to roll out based economy. And while I believe that for a long time this is the first I guess public validation that one of the ULCCs is throwing in the towel on the point-to-point business model and switching to a network model. And look that’s a lot more complicated. It’s one thing to run a point-to-point network, but when you’re trying to run connecting traffic, you got to slow down the aircraft utilization because you got to wait for passengers and employees to connect and airplanes to be timed correctly.
You got to staff up, because you have peaks and valleys, you got to connect bags, which is one of the most operationally difficult thing we do. Today if Frontier has a flight from Orlando to Denver and it’s delayed by two hours, all they have to do is run the flight two hours, but the customers still get there and it’s not a good experience, but it’s not the end of the world. Tomorrow when they’d have half the people in that airplane that are connecting, if that flight is two hours late, their choice and they got one flight a day to all these markets, do we delay everything else for the rest of the day by two hours or do we have half the people on that airplane go to a hotel and spend the night or do we buy [indiscernible] half of the people in that airplane tickets on United to get them to their destination that day.
It is exponentially more complex to run a connecting model. And for Frontier to publically acknowledge that the old business model has run out of growth opportunities in the middle of an IPO process I just view as a phenomenal validation of everything we’ve done has worked and our ability to compete and win against them. And I can promise you they’re not competing on our turf and trying to get a network carrier in Denver, that is a battle I guarantee United will win.
ABOUT AUTHOR
Vinay Bhaskara
VINAY BHASKARA
Senior Business Analyst, Airways Mag.com