United Airlines executives struck a bullish tone about the strength of international markets, even if the disruption to its Tel Aviv services was a key contributor to a weaker fourth quarter outlook.
While record revenues helped United disclose new profit highs for the third quarter on 17 October, the carrier’s share price faltered after it flagged the impact of higher costs and the suspension of its Tel Aviv flights following the outbreak of war between Israel and the Gaza-based militant group Hamas earlier this month.
”Our operations in Tel Aviv have been impacted by the recent events in the region and is materially impacting our outlook,” explained United Airlines’ new chief financial officer Michael Leskinen said during a third quarter results call on 18 October. ”This market represents approximately 2% of our capacity.”
United is guiding for earnings per share of $1.80 in the fourth quarter – below analysts expectations of just over $2 – on the assumption that its suspended Tel Aviv flights resume in November. However, it warned this could fall to $1.50 if Israel services remain suspended for the whole quarter, given the associated impact on reduced capacity and higher cost per available seat mile. ”It is very difficult to cut the associated expenses related to this flying so close in,” says Leskinen.
The airline’s capacity ambitions for the last quarter of the year have also been hit by a shortage pilots upgrading to become captains, something it hopes to have addressed with its recently agreed deal with pilots union ALPA.
”We expect to fly in the fourth quarter about three points lower than we thought just three months ago. Two points of that is due to the captain upgrade issue,” Leskinen says. “It is impacting the entire industry. We have navigated it really well, but it did hit us at the end of the year.
”Our new contract with ALPA does fix that, so we have a full expectation that that constraint goes away. The other point is due to the violence in Tel Aviv. That is something we can resposition over time as we would expect to serve Tel Aviv when the violence ceases.
“So those three points coming out relatively rapidly, you can’t take the costs out – that was the majority of the increase in CASM-ex for the fourth quarter. We expect to mitigate that in 2024 and beyond.”
Alongside higher fuel costs, Leskinen also highlights rising maintenance costs. “We are not sure how persistent it is yet,” he says.
”Maintenance costs are higher than we expected, and for United a big piece has been the increased need for spare parts. That’s on aircraft, but particularly when we repair engines and the work scope has been larger than expected. Some of that is related to supply chain, and it’s difficult to see when that ends.”
International drives revenue growth
United lifted net profits a fifth for the third quarter to $1.1 billion as revenue climbed over 12% to $14.5 billion. That includes international passenger revenues up almost a quarter to $5.7 billion.
The carrier’s chief executive Scott Kirby says: ”The third quarter was another solid milestone to demonstrate United’s actions are working as expected and the growth we are adding is profitable. Though fuel spiked this quarter, we’re very encouraged about our results.
“We have unmatched geographic diversity with a large domestic network complemented by the largest long-haul international network, and both are solidly profitable.
He adds: “While it is a great attribute, it does create some short-term risk of volatility as we are seeing right now with the transitory hit in margins this [fourth] quarter as a result of the tragedy in Israel.”
However, the airline sees plenty more strength in its international network. United Airlines’ chief commercial officer Andrew Nocella says: “We did focus the majority of our third quarter growth on international. International profit margins remain well ahead of domestic, though domestic margins remain solidly profitable.”
Notably the airline reported record profit levels in the third quarter for its expanding Atlantic and Pacific operations. “Demand for the Atlantic and Pacific was truly outstanding [in Q3] and we see that trend continuing into the fourth quarter,” Nocella says.
United has expanded sharply on transatlantic routes since the pandemic – Cirium schedules show its European capacity 25% above 2019 levels in the third quarter – and Nocella says it will look to mature this expansion next year.
“We continue to see strength across the Atlantic, we particularly see it to southern Europe. We think the trends are going to continue,” he says, but adds: “We are going to give the Atlantic a rest. We’ve run a lot since 2019, and this year [2024] will be a year of basically no capacity growth across the Atlantic.”
The airline is continuing to add capacity to recovering Asia-Pacific markets, notably added its first flight back to Beijing next month.
“The last part of the world to recover [from the pandemic] is Asia and Asia is still… very strong,” he says. “United has taken full advantage of the demand surge across the Pacific, with capacity being added to key markets. We are going to focus our efforts on where we see the profitability opportunity.”
While the airline did not issue capacity guidance for 2024, Nocella notes it will grow in Asia and that domestic capacity will be relatively flat for the first half of next year.
“United will moderate our domestic growth plan for the first half of 2024 because we’re focused on building our Asia-Pacific line where we see the strongest short-term result,” says Nocella.
“We are really bullish on international,” he adds. “We have come a long way. It is very profitable. There is a lot more to come, and during the latter part of this decade, I think we will lean into it even further.”
