United Airlines’ (NASDAQ: UAL) CEO has lots of reasons to talk to his pilots right now. The airline emerged from the pandemic with several distinctives. Unlike competitors, UAL did not retire widebody aircraft and did not downgrade pilots but rather retained them in their current positions (aircraft and bases) so that the airline could quickly ramp up capacity when the pandemic ended. During the pandemic, United committed to a follow-on order for Boeing (BA) 737MAX aircraft that involves the addition of more than 500 new aircraft over the next 5 years with most of them narrow-body (single aisle) domestic aircraft. In addition, United is aggressively working to dramatically reduce the size of its contracted regional jets and transfer that flying to its own pilots which is sweet music to the ears of its pilots.
United has long prided itself as being the largest international US carrier. United acquired its Pacific network from Pan Am almost 40 years ago and has been steadily building its global network organically and through mergers and acquisitions. United’s widebody long haul international fleet currently numbers almost 200 aircraft (one-fourth of its total mainline fleet) with just a dozen Boeing 787s due for delivery. United’s average aircraft age of 16.5 years is the oldest among large US airlines. It is precisely the age of UAL’s fleet and its large fleet of 777s that give UAL’s CEO reason to talk about a massive new aircraft order, which he apparently recently did with pilots at UAL’s pilot training facility in Denver.
According to the United contract sub-forum of Airline Pilot Forums, a publicly accessible airline pilot chat forum, UAL’s CEO is a common site at its pilot training facility but he has been a much more common visitor in recent weeks. UAL touted weeks ago that it was the first US airline to reach a contract with its pilots union representatives for a new contract. The rank-and-file pilots began the voting process and voiced their displeasure, including in online forums, at the relatively low pay increases for line pilots while training pilots were set to receive hefty increases in order for UAL to train the pilots necessary to staff the massive number of new aircraft that UAL is set to receive in the next few years. To avoid admitting defeat of the proposed contract, the union extended the voting period but it was clear that the proposed contract was doomed. UAL’s CEO has every reason to spend time with pilots and try to convince them that the company has their best interests in mind. UAL executives have made similar statements to their employees over the past six months indicating that the pilot comments are very likely valid.
United’s Widebody Fleet Overview
While the United NEXT program will replace hundreds of airplanes’ worth of contracted regional jet flying with UAL piloted aircraft, the need for an international order is based more on age and fuel efficiency. UAL operates the world’s largest fleet of 777-200 and -200ER aircraft. The former are the “base” version of the Boeing large twin jet that opened the Pacific to dozens of new routes as the 767 had done over the Atlantic. The early versions didn’t fly the Pacific but were used on some transatlantic routes and are now used on domestic routes, including to / from Hawaii, largely in a high-density configuration that seats more passengers than any other aircraft in the United fleet. United operates 55 777-200ER, largely in international configuration although the model is the least fuel-efficient aircraft in the US scheduled airline widebody fleet on a per seat basis. In addition, UAL operates 22 777-300ER; physically the largest aircraft in United’s fleet, the big Boeing twin has 16 plus hours of range but also burns the most fuel per hour of any aircraft among US scheduled airlines. While the 777-300ER fleet is relatively young, the remainder of the nearly 100 strong 777 fleet is well over 20 years in average age. In addition to its 787 and 777 fleets, UAL operates a fleet of over 50 767 aircraft for which there is no direct cost-efficient replacement.
The United Airlines of today was the airline division of what would become Boeing Commercial Airplanes although federal law required that airlines and aircraft manufacturers be separate companies. Still, UAL has been a faithful Boeing customer for decades even though it also operates a large fleet of Airbus aircraft and has also operated aircraft from other manufacturers. UAL’s CEO says that it expects to choose as soon as later this year between versions of the Boeing 787 – of which, United operates 63 copies in three versions – or the Airbus 350, for which United has a firm order for 45 aircraft, all of which are after 2023.
Two Advanced Technology Widebody Families
The Boeing 787 and Airbus (OTCPK: EADSY) 350 are both all-new aircraft with carbon fiber airframes and the newest generation engines and both families offer significant fuel and maintenance cost savings over older generation aircraft. The 787 is offered in three versions seating from 243 to 318 passengers in United’s configurations. The middle version has the greatest range, capable of 16 plus hour flights. The largest version the 787-10 has some of the best per-seat economics in the US airline fleet.
The A350 was designed after the B787 and, just as Airbus has done with many models, is larger than its most direct Boeing competitor, which often results in better per seat economics. The only US airline that operates the A350 is Delta (DAL), which has 306 seats on its A350-900s, approximately 50 seats more than United has on its B787-9s; the two models are the most comparable in performance; both are capable of 16 plus hour flights. Although Delta generally has lower percentages of business class seats on its fleet than United, the 50 seat difference in seats demonstrates the advantages of the larger size of the A350 which also comes in a larger model which should seat approx. 325-350 seats in United’s configuration. The A350-1000 is unusual in that it has more range than the -900; in most aircraft families such as the B787, the largest model has less range than the next smaller model. Just as Boeing has done with the 777X, Airbus is modifying the interior walls of the A350 to add an additional seat at each row, making the A350 a 10 abreast aircraft in economy class, improving its economics, if airlines choose.
A Potential Massive United Order
United’s CEO says that the company will choose between either the B787 or A350 families in what will likely be a winner-takes-all contest. He also says that the order could be for 100 or more aircraft, more than American’s current widebody international fleet – which numbers 113 aircraft. If confirmed, UAL’s order would likely be worth more than $ 15 billion even at typical discounts. Even though UAL has an order for A350 aircraft, CEO Kirby is willing to consider the cancellation fee both for Airbus and the Rolls-Royce engines that power that aircraft; although Rolls-Royce makes engines for the B787, UAL 787s are powered by GE engines. Kirby says that operating a second widebody fleet type would cost hundreds of millions of dollars in additional operating costs per year. Boeing is developing range improvements for the B787 models that UAL is likely to order while Airbus has recently done the same for the A350. One final consideration is that Delta holds the maintenance and overhaul contract for Rolls-Royce engines, which power the A350 which means a large UAL order for the A350 would benefit Delta. In summary, the A350 is a larger and more capable aircraft but the B787 has the incumbent advantage.
United’s Finances Are Already Stressed
While the prospect of a massive order could be salivating for either Airbus or Boeing, United’s finances should lead to pause for investors. First, United reported a 2Q 2022 net income profit margin of just 2.7%, the lowest of the big 4 US airlines. Its previous guidance for the third quarter was for a ~ 10% adjusted operating margin, an improvement from its second quarter actual figure of 8.2%, which is likely to be aided by an easing of crude oil prices this summer. UAL’s second quarter 2022 fuel cost per available seat mile was the highest of the big 4, just slightly higher than American Airlines (AAL) but 11% higher than DAL, which benefitted from a more efficient fleet and its refinery strategy. UAL’s fuel cost per ASM was 39% higher than LUV, which is gaining substantial benefits from its hedging strategy and also because LUV is a more efficient airline.
In addition to its currently low profitability relative to the industry, UAL has the second-largest debt load behind American, which itself is winding down a more than 10 year massive fleet acquisition strategy; much of AAL’s fleet acquisition was done when its profit margins paralleled what UAL is reporting now. UAL’s capex is one of the highest in the industry at more than $ 25 billion for the next five years and another $ 9 billion beyond 2026. UAL’s massive domestic fleet acquisition strategy is the result of its strategy to replace hundreds of its regional jets with mainline aircraft; pre-covid, UAL contracted for the highest number of 50 seat regional jets among US airlines and more than half of UAL’s domestic flights were on contracted regional jets. The regional jet pilot shortage and soaring regional jet pilot wages are forcing the company to accelerate its transition from regional jets to mainline aircraft but the strategy will add significant debt and leases to UAL’s balance sheet. While operationally needed, a massive widebody aircraft order will add further stress to UAL’s balance sheet and likely extend large fleet capex every year throughout the remainder of this decade, very likely making UAL’s balance sheet the most fragile in the US airline industry. Add in that interest rates are increasing and the cost of aggressive fleet replacement grows even more.
United’s Widebody Aircraft Order Is Likely
The current environment of high fuel prices and rapidly growing labor costs combine to drive a greater need for more efficient aircraft than at perhaps any time in the history of US aviation. On balance, the industry has yet to recover from the Covid pandemic and there are growing indications that the level of high value business travel that existed pre-pandemic will never return. Add in the likelihood of a recession – if the US and western Europe is not in one already – and this does not seem a good time at all for any company to be embarking at industry-leading levels of capex.
United has a great need to refresh its widebody international fleet; its current international fleet burns around $ 500 million more fuel than if at least half of UAL’s least efficient aircraft were replaced with more efficient aircraft. United has committed to maintaining a leadership position in international markets and yet its international fleet is less efficient than Delta as well as many major global competitors. However, UAL’s international fleet needs cannot be considered isolated from its massive domestic aircraft acquisition.
Even though internet rumors have to be carefully vetted, there is a high likelihood that the comments from UAL’s CEO about a massive widebody aircraft order are true. United has established a reputation under its current executive team with its domestic fleet orders for going very big which means that, if UAL places a widebody aircraft order, it will be very big. Boeing would appear to have advantages based on United’s position as an incumbent 787 operator while the A350 probably would offer greater capability. Either Airbus or Boeing is likely to be a bigger winner if United’s massive order materializes than United itself.