United Airlines will shrink its Newark hub by about 10 percent following flight disruptions at the end of June that affected thousands of travelers and cut into its second-quarter profits.
The Chicago-based carrier will operate around 390 daily departures during peak days in August, Chief Commercial Officer Andrew Nocella said during a quarterly earnings call on Thursday. That’s down from the current peak of up to 435 departures a day. United hopes to reduce future flight disruptions by operating a smaller schedule at capacity-constrained Newark.
“We’re now doing more than ever to mitigate the impact of weather, congestion, and other infrastructure constraints at Newark and, frankly, to build a schedule at Newark that’s more manageable given the frequency of weather events and the variable operating constraints that exist there,” United CEO Scott Kirby said. Constraints include a cap on flights of up to 81 an hour, limited gate space, and an air traffic controller shortage in the New York area.
Kirby previously warned that United could shrink its Newark schedule in response to the June disruption.
Flight reductions are not the only way United plans to avoid network-wide disruptions in the future. The airline will also soon add six more gates to its facilities in the new Terminal A; it will adjust its schedule so that aircraft will fly more out-and-back trips from Newark where a plane goes to, for example, Richmond, Va., and back rather than to another hub; invest in more resilient crew scheduling software; and work more closely with Newark airport’s operator (the Port Authority of New York and New Jersey), and the U.S. Federal Aviation Administration. Kirby repeatedly emphasized the latter partnerships, which was an about-face from his initial comments on the disruptions.
All of these initiatives aim to avoid future network-wide operational disruptions. At the end of June, severe weather in the New York area prompted flight cancellations at Newark that rippled out across United’s global network. More than 4,000 flights were cancelled during the week leading up to the July Fourth holiday in the U.S.
United executives declined to put a dollar value to the cost of the disruptions, though Chief Financial Officer Gerry Laderman said they cost the airline roughly one point of profit margin in the second quarter.
The carrier’s $2.4b in second quarter operating profit generated a 16.8% operating profit margin; both numbers exclude special items. Revenues came in at a quarterly record of $14.2 billion. Total unit revenues, or TRASM, were down 0.4% while unit costs, CASM, excluding fuel and special items, were up 2%. The flight disruptions at the end of June contributed 1.5 points to the unit cost increase.
The flight reductions will reduce United’s capacity growth in the second half of the year, Kirby said. The reductions appear on the margins as the airline forecasts full-year 2023 capacity growth of roughly 18% compared to just “high teens” before. Long-term, however, the flight reductions are not forecast to result in a long-term reduction in capacity thanks to the introduction of new, larger aircraft.
Newark situation aside, here are five takeaways from United’s second-quarter call.
Asia Travel Surged
“The resurgence of the United Pacific entity has been the most transformative,” Nocella said. While overall international revenues increased 44% year-over-year to $5.3 billion on a 27% capacity increase, Pacific revenue jumped 161% to $1.1 billion on a 116% capacity increase. That surge was driven largely by the reopening of large markets, like Japan, to all international travelers. United has long been the largest U.S. airline to Asia, which put it in the unique position of benefitting the most from the region’s reopening, but also hurt the most when travel was restricted. In a sign of the airline’s bullish view on Asia, earlier this week it unveiled three new routes this winter: Los Angeles to Hong Kong and Tokyo Narita, and San Francisco to Manila.
Strong Travel Demand Continues
“We don’t see a change in the Q3 environment,” Nocella said. “We see steady and strong demand.” That’s true both internationally, as mentioned, and domestically where there are concerns that travel demand could abate after the Labor Day holiday in early September. Lucrative corporate travel demand held steady in the second quarter with revenues roughly flat to 2019; volumes remain below levels seen four years ago. And, unlike at Delta Air Lines, United executives did not mention any potential corporate travel revenue upside coming this fall.
United’s Investment in Larger Planes is Paying Off
“Replacement of single class [regional jets] with mainline aircraft with multiple types of seat upgrade opportunities is a key driver of our revenue growth,” Nocella said. This initiative, or “upgauging” where an airline replaces older, smaller aircraft with new larger ones, will see United add more than 500 new Airbus A321neo and Boeing 737 Max aircraft to its fleet by the end of the decade. As these larger aircraft replace smaller ones, United will be able to offer U.S. domestic connections and, per its plan, higher revenues. Domestic revenue was up 8% year-over-year to $7.7 billion in the second quarter. United’s average number of seats per departure was 130 in the second quarter, up from 119 seats a year ago and 111 seats in 2019, according to Cirium Diio data.
Polaris Retrofits are Done
United is done retrofitting its fleet of 220 widebody aircraft with the Polaris premium product it debuted in 2016. That is, except on the high-density Boeing 777s it flies on domestic routes. But the completion of retrofits comes not a moment too soon: Premium leisure travel demand remains robust and, with international corporate demand still down from the pandemic, there is significant runway for premium revenues to rise. United does not break out premium revenues as Delta does. And, with every aircraft equipped with Polaris, it’s about time United begins evaluating the next iteration of its premium cabin, the shelf life of which is typically less than a decade.
And The Numbers
Looking ahead, United expects revenue to increase 10-13% year-over-year in the third quarter. It forecasts a profit of $3.85-4.35 per share, but did not provide margin guidance. Capacity will be up roughly 16% compared to 2022.
United expects 28 aircraft deliveries in the September quarter. This includes its first A321neo.