Last night United Airlines President Scott Kirby gave an extended airline economics lecture to investors, explaining how they make more money by building up their hubs. As a result they’re projecting to grow capacity 4% – 6% in 2018 — and continue growing at a similar clip through 2020.
Kirby and the rest of the United team know that growth is unpopular with investors. More seats mean lower prices for the industry. And investors don’t just invest in United, they generally invest across the industry.
So he tried to make the case that they’re really only restoring capacity they used to offer, not growing to some new higher level. But investors so far don’t seem to be buying it.
United shares opened today down sharply.
Kirby may not even be wrong. And though I don’t buy and sell individual stocks on a day trading basis UAL may be sharply oversold, it’s reasonable to think that the price will recover. However the market delivered a sharp message in response.
I actually think share buybacks — United has been taking the bulk of its profits and buying its own stock instead of investing that cash in the future of the airline — signal that a business doesn’t have strong growth prospects. There’s no better business use for the cash than using it to boost earnings per share by reducing the denominator.
So it’s encouraging to see an experienced airline executive betting on growth in domestic markets — which is where Kirby sees United’s growth, while suggesting that over time international growth will mirror GDP growth in scale. (Delta of course takes a different tact towards growth, buying significant stakes in airlines around the world.)