United Sees 2023 as Setting Course for Its Post-Pandemic Future

When the pandemic first struck in 2020, airline executives were quick to say there was no crystal ball to predict the future of the industry. Now, three years after the pandemic began and as it reaches its natural ebb, United Airlines says that future is coming into focus, with this year setting the path for the airline industry’s post-pandemic future.

Or at least that’s how they explained the carrier’s -0.4 percent operating margin in the quarter. The first quarter historically has been tough for Northern Hemisphere airlines, as the industry enters the trough after holiday demand and before the summer peak season. But United’s leaders say they are seeing something different now, and although they say it’s too early to tell if this is the post-pandemic future, they feel confident they have spotted a trend.

“You can’t run your airline like it’s 2019,” CEO Scott Kirby said. “It’s different and harder now.”

Business travel, which historically is strong in January and February has not returned to its 2019 level, especially in United’s domestic network, Kirby told analysts during the airline’s first-quarter earnings call on Wednesday. “There is a clear change in seasonality,” he said, partially driven by the decline in traditional business travel and the rise in remote work and its blending of leisure and business travel. Instead, the airline expects both business and leisure demand to peak between March and October and will flex its capacity up during that period.

Macroeconomic issues have not yet affected business travel. Domestic business demand fell by about 8 percent immediately after the collapses of Silicon Valley Bank and Signature Bank in March but rebounded within two weeks. The banking crisis did not affect domestic leisure or international business and leisure demand.

Softening business demand was offset by strong leisure demand as consumers continued spending, Kirby said, adding that he believes the economy is headed for a “soft landing” rather than a full-blown recession. If, however, the economy weakens further, United is prepared, able to adjust capacity down to reflect a drop in demand.

Hopes Lie Abroad

United’s domestic first-quarter revenues were weaker than the competition’s, due in large measure to United’s relative weakness in Florida, Chief Commercial Officer Andrew Nocella said. But the carrier is banking on its international network, which was responsible for 46 percent of the carrier’s first-quarter revenue, compared with 43 percent in 2019.

The Chicago-based airline this week announced new flights to Christchurch, New Zealand, adding to other recently announced new routes in the region, including more capacity to Brisbane, Australia, and Auckland, New Zealand. The South Pacific network offsets United’s summer European network. Now, the carrier will deploy widebodies to the South Pacific that previously would have been scheduled for maintenance or would ply domestic routes, Nocella said.

Comparisons to the first quarter of 2022 are eye-popping, with international revenues up 106 percent, and international PRASM up 52 percent. European passenger revenues rose 129 percent compared with 2022, while Latin America rose 52 percent, Middle East and India up 36 percent, and the Pacific network rose 324 percent. United expects to have more than 200 daily flights across the Atlantic this summer, Nocella said. “We’re bullish on international capacity,” he said.

But the impressive comparisons are misleading. Covid’s Omicron variant was raging during the first six weeks of 2022, and many countries had yet to reopen. United’s China network, which had been a bright spot up till March 2020, remains largely idled, at four flights per week, which Nocella said he hopes will increase by the end of this year. The aircraft that would have flown China routes now are being deployed elsewhere in the international network — on new routes to the South Pacific, for example.

Domestic Challenges

The pilot shortage that threw the U.S. industry into crisis last year has largely abated, Kirby said. The carrier instead is relying less on regional aircraft and has upgauged to Boeing 737s. However, this has had an effect on domestic connectivity.

Bank sizes at United’s hubs are down 10-20 percent from 2019 at United’s major hubs, Nocella said. This is expected to improve during the year as more of the 737 Maxes United has ordered come online. Next year, United expects further growth in mainline gauge on its domestic network. “The comps year over year will be better,” he said, with the carrier focused on rebuilding domestic connectivity through next year.

The carrier is seeking to reduce its seasonality versus its competitors, Nocella added, but there is no fix in the short term. “We are simply smaller in Florida,” he said, adding that United plans to grow in Florida faster than its competitors to catch up. The introduction of more South Pacific flights in the winter will help offset some of this seasonality and is a network advantage competitors can’t match.

“We need to see how remote work schedules continue to play out,” Nocella said. “October and September were fantastic last year,” and the carrier is waiting to see how those months will pan out this year. Plans to peak the airline’s capacity in July remain unchanged.

And Now, the Numbers

United reported first-quarter operating revenues of $11.4 billion, up 51 percent from last year, with operating expenses of $11.5 billion, a 28 percent increase from 2022. Unit costs excluding fuel were roughly flat and are expected to remain flat in the second quarter, despite an 18.5 percent increase in capacity compared with 2022. United reported an operating margin of -0.4 percent, or 17.8 points higher than last year. The carrier’s pre-tax loss for the quarter was $256 million, compared with $1.8 billion last year.

Cargo revenues, a pandemic-era bright spot, fell 37 percent from last year to $398 million, as surface shipping and airfreight rates have fallen precipitously from last year.