United: In 'New Reality,' Aggregate Industry 2023 Capacity Outlook 'Unachievable'

January 19, 2023


United Airlines CEO Scott Kirby did not mince words during the company's Wednesday fourth-quarter earnings call, terming industry capacity aspirations for 2023 "simply unachievable." 

He said that all companies, including airlines and the U.S. Federal Aviation Administration, need to staff at higher levels, an effort he said was hindered by such constraints as the ongoing pilot shortage, lower experience levels, elevated sick rates because of Covid and some state legislation that makes calling in sick easier.

"We believe that any airline that tries to run at the same staffing levels it had pre-pandemic is bound to fail and likely to tip over to meltdown anytime there are weather or air traffic control stresses in the system," Kirby said. He added supply chain challenges to the list of constraints to growth and said "most airlines with the exception of network carriers" have outgrown their technology infrastructure and "simply cannot operate reliably in this more challenging environment."

For United, the company needs to carry at least 5 percent more pilots per block hour than pre-pandemic, Kirby said, and air traffic control challenges mean its taxi and in-route flight times are "elevated and growing," so the same number of block hours probably produces 4 percent to 5 percent fewer available seat miles. 

"Put it together, and we need 10 percent more pilots and 5 percent more aircraft to produce the same number of pre-pandemic ASMs," Kirby said. "Like it or not, that's just the new reality and the new math for all airlines." 

Kirby also noted that the disruptions during the holidays was not a one-time event, and it was not just one airline. "The weather was the straw that broke the camel's back for several [carriers]," he added. "This keeps happening over and over again."

Still, he said that while overall demand will be different in nature than it was before the pandemic, eventually it is expected to grow to at least 2019 levels per gross domestic product, and that the structural changes in the airline industry have set it up for higher margins than before the pandemic. 

For a forward indicator of industry capacity levels, "watch the completion factor," Kirby said. Those carriers with low completion factors will indicate "they can't fly their schedule, and they're going to have to adjust one way or another. That's what happened last year, and it is what I think is going to happen [this] next year."

Business Travel Recovery

United sees the "continued but slow recovery of traditional large corporate business travel," said EVP and chief commercial officer Andrew Nocella. While November and December volume was low relative to October, "which was a really good month for corporates," January is at or above October numbers and "materially better by about five points versus the average for quarter four." 

Nocella added that some companies exhausted their travel budgets early in 2022, which is one reason why the last two months of the year were a "bit disappointing for large corporate travel."  

He also shared that the corporate segment is "moving in the right direction. We are highly confident, particularly for long-haul global, that we are going to get back to full strength, and that's an enormous tailwind for airlines that rely a lot on corporate travel."

Q4, Full-Year 2022 Metrics

United reported $11.2 billion in fourth-quarter passenger revenue on total revenue of $12.4 billion, up 12.8 percent and 13.9 percent over Q4 2019, respectively. Full-year 2022 passenger revenue was $40 billion, up 1 percent over three years prior, with total revenue up 3.9 percent for the period to $45 billion. 

Net income was $843 million for the quarter, up 31.5 percent from fourth quarter 2019, while 2022 net income was $737 million, down 75.5 percent from the $3 billion reported in 2019. Fourth-quarter capacity was down 9 percent versus Q4 2019. 

Domestic passenger revenue for the quarter was $8.2 billion, up 13.6 percent from three years ago. Europe accounted for $1.7 billion in international passenger revenue, up 11.4 percent from Q4 2019, with Latin America at $1.1 billion for a 30.1 percent increase. The Middle East and Africa was at $404 million, or 55.4 percent above 2019 levels. The Pacific region reported $824 million in passenger revenue, but that represented a 24.3 percent decline over three years prior.

United had more than 38.2 million passengers in the fourth quarter, about 5.1 percent less than in Q4 2019. It reported 144.3 million passengers for full-year 2022, down 11.2 percent from three years ago. 

The average fuel price for the quarter was $3.54 per gallon, with the annual average at $3.63 per gallon. 

United's first-quarter 2023 guidance included capacity up about 20 percent year over year, with full-year 2023 capacity up by a high-teens percentage compared with 2022. Total revenue is expected to be 50 percent higher for the quarter and up in the high teens for the full year. The carrier anticipates Q1 2023 average fuel cost to be $3.19 per gallon, with the full-year estimate between $2.85 and $2.90.

RELATED: United Q3 2022 earnings



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