United Airlines CEO sees 3 barriers to growth

Scott Kirby, chief executive of United Airlines, sees three concerns that he warns are barriers to growth, even as United enjoys the return of strong, lucrative demand for air travel.

United Airlines CEO explains three barriers to growth

In a note to employees and again during a call to investors about United’s second-quarter financial results, Kirby laid out three “headwinds” that could negatively impact growth:

  1. Industry-wide restrictions have led to significant operational disruptions, and have constrained the industry’s ability to grow
  2. Sharp rise in fuel prices
  3. Increased likelihood of an economic slowdown or recession

In terms of industry-wide restrictions, Kirby noted that they have forced United to be smaller, leading to more headcount:

“To meet the challenges posed by the commercial aviation ecosystem that struggles to handle the number of aircraft operating today, we have chosen to keep United Airlines smaller and overstaffed in order to provide us with more protection against these external constraints that only we can control.” We will also continue to prioritize reliability by increasing staffing until the entire aviation infrastructure is back to normal. What it means is, there will be cost pressures until we catch up and we can go back to traditional use and employment.”

What are these external constraints? Kirby lists several lists including:

  • Shortage of pilots, especially with regional airlines feeding the United main lines
  • Decline in Asian long-haul aviation
  • Aircraft delivery delays
  • Infrastructure restrictions that affect all aviation
    • Air traffic control issues are likely to top that sub-list

In terms of fuel prices, Kirby sees higher prices as less of an existential threat, as costs are passed on to passengers, than a missed opportunity to increase margins:

“At current fuel prices, the consolidated fuel bill will be US$9 billion higher than in 2019. And for what it is, we are building our long-term plans, assuming this is the new normal for fuel prices. The good news is that rising fuel costs is something that affects On all airlines. And at least for United, we’ve seen this become very much a cost crossover today.”

In terms of demand, Kirby believes that the economic slowdown is likely to be matched by a continued rise in demand as the world emerges from the pandemic and stabilizes in the new normal:

“We’re still seeing strong demand. And one thing that’s differentiating United in particular and aviation in general, is that we’re still probably in the sixth or seventh inning of the COVID recovery. So there are two trends of aggregate demand, slack versus ongoing recovery of COVID, working across purposes. For now, at least, the trend of recovery from the Covid virus is at least canceling and arguably beyond economic headwinds.”

The result will be 8% growth in 2023, which is less than United expected earlier this year. Kirby explains that this is necessary to prioritize operating reliability over anything else.

Maybe anything else except for the margins. Kirby was known as the bean counter at America West, US Airways and American Airlines and this aspect was featured in this comment as Kirby assured investors that United is on track for a 9% margin in 2023:

“And that is perhaps the most important point, at United we will do whatever it takes to achieve our margin target.”

“whatever it takes” is powerful language. If you’ve ever wondered why United isn’t investing more in soft products, consider this statement.

conclusion

While Kirby sees three headwinds for growth, two of the three don’t see them as inherently problematic (high fuel prices are passed on to customers and the slack will be offset by increased post-pandemic demand). That leaves the industry itself – the unknowns and known problems of pilot shortages, outdated infrastructure, aircraft delivery delays, all of which could negatively impact United and the entire industry in the coming months.

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