As a general matter I think any airline whose operations are being run by Scott Kirby is going to get worse not better for customers in terms of passenger experience. At the same time there’s no one in the industry I’d rather listen to because he’s earnest and thoughtful and lays out more clearly than anyone else his belief about how his business, and the broader industry, works.
In United’s investor event this afternoon he laid out United’s assets both in terms of domestic network and positioning to acquire high yield premium cabin international business. Kirby walked through airline economics, United’s positioning, and marginal analysis with a primary goal of convincing investors it is okay for United to grow.
He outlined United’s hubs in the most important US cities for premium cabin demand.
Kirby makes the point as well that they’re in the best alliance or the alliance with the most potential. The Star Alliance is largest although it isn’t necessarily the alliance with the best positioning of its hubs outside of Air China in Beijing and ANA in Tokyo.
- A major challenge for Star is weakness in London. oneworld has British Airways, and Delta owns 49% of Virgin Atlantic. Star is weak in Paris and Hong Kong.
- oneworld is weak in mainland China which is why American bought a small stake in China Southern. Chinese premium traffic is an important growth area, there’s a reason that American Express opened its first international Centurion Lounge in Hong Kong — and we can expect Asian growth from Amex as well.
Scott Kirby observed about their domestic hubs that “It’s rare we’re overflying our own hubs.” Probably the very first thing I learned in the airline industry decades ago was that you don’t make money overflying your own hubs, a challenge American Airlines has with Los Angeles (legacy American) and Phoenix (legacy US Airways) and with New York JFK (legacy American) and Philadelphia (legacy US Airways).
He explained both the position of their hubs and the economics of growing a hub, spreading fixed costs across more flights and seats and driving more people through hubs supporting existing connecting flights.
He argues that connecting itineraries are more profitable. That has turned conventional wisdom on its head. It used to be that non-stop flights earned revenue premiums and connecting traffic was filler. However small cities don’t usually have much ultra low cost carrier competition. Carrying passengers out of those markets means carrying them at ‘higher than Spirit’ fares.
He also reiterated a point he made in October – growing domestically means more credit card customers. Selling miles is more profitable than flying, but you need to fly so people think they need your product.
Further making the case that growth is necessary for an airline rather than shrinking, he points out that pulling regional jet capacity out of small markets loses premium traffic from those markets, sends those regional jets into larger markets where passengers prefer competitors with bigger planes, and reduces the value of the network overall. He tosses out that United shrunk capacity because of investor pressure. Here he’s trying to sell growth to investors who have been vehemently anti-growth.
Making the case even against shrinking during slow season — revenue is down in January and up int he summer — he suggests that flying even with low revenue is good because non-fuel costs are mostly fixed. You have planes, gates, and people on the books anyway. So when United pulled back capacity they retained high average revenue but average costs were high too. He’s really explaining marginal analysis — something I emphasize on the blog and that many investors have a hard time with.
Given Kirby’s focus on growing the network of the airline, he laid out their metrics going forward to “Make United Great Again” and drive margins.
That means growth, and Kirby ends the discussion saying he believes in consolidation and cutting unprofitable flying. So he asks for trust that this isn’t the opportunity, that United needs to grow and get back to the level of flying they had been doing before they made network cuts in recent years.
To be sure growth that’s not simply matching competitors and defending hubs, so if investors show confidence in this presentation it will signal a departure from the pure and mindless capacity discipline focus that analysts are sometimes criticized for.