The numbers
- Revenue down 1.1% to $9.15 billion
- Operating expenses up 5.0% to $8.10 billion
- Wages and salaries up 7.0% to $2.47 billion
- Fuel expenses up 1.1% to $1.24 billion
- Operating profit down 31.6% to $1.05 billion
- Operating margin of 11.5% vs. 16.6% in Q1 2016
- Net Profit down 36.3% to $603 million
- Capacity (ASMs) down 0.5% YOY
- Unit Revenue (PRASM) down 0.5% YOY to 13.28 cents
- Unit Cost (CASM) up 5.5% to 13.99 cents
- Unit Cost (CASM) excluding fuel up 5.2% to 11.43 cents
- Revenue up 2.7% to $8.42 billion
- Operating expenses up 7.9% to $8.14 billion
- Wages and salaries up 6.9% to $2.66 billion
- Fuel expenses up 28.1% to $1.56 billion
- Operating profit down 57.2% to $278 million
- Operating margin of 3.3% vs. 7.9% in Q1 2016
- Net Profit down 69.3% to $96 million
- Capacity (ASMs) up 2.6% YOY
- Unit Revenue (PRASM) flat at 12.00 cents
- Unit Cost (CASM) up 5.1% to 13.61 cents
- Unit Cost (CASM) excluding fuel up 1.4% to 11.01 cents
- Revenue up 11.4% to $614.2 million
- Operating expenses up 20.4% to $546.9 million
- Wages and salaries up 17.5% to $151.0 million
- Fuel expenses up 48.1% to $103.5 million
- Operating profit down 30.6% to $67.3 million
- Operating margin of 11.0% vs. 17.6%% in Q1 2016
- Net Profit down 28.3% to $36.9 million
- Capacity (ASMs) up 2.6% YOY
- Unit Revenue (PRASM) flat at 12.00 cents
- Unit Cost (CASM) up 5.1% to 13.61 cents
- Unit Cost (CASM) excluding fuel up 1.4% to 11.01 cents
Oil prices create harsh YOY picture
Your quarterly reminder that airlines are being saddled with really expensive labor contracts
United is finally responding appropriately to the Dr. Dao incident, but it may be too late
Before we review United’s performance for the previous quarter, I want to address the events on last week. The incident on Flight 3411 has been a humbling, learning experience for all of us here at United and for me, in particular. In addition to apologizing to Dr. Dao as well as all the passengers aboard, I also want to apologize to our customers. You can and should expect more from us and as CEO, I take full responsibility for making this right. We’ve always sought to repay our customers’ trust with the highest quality of service and deepest level of respect and dignity. We are and will make the necessary policy changes to ensure this never happens again. Those changes began with two key announcements last week. First, from now on, we’ll not call for law enforcement to remove passengers from our flight, except in cases of security or safety concerns. Second, crews traveling on our aircraft must be booked at least 60 minutes prior to departure. In addition, we continue to review a broader array of policies and systems that factor into situations like this. And importantly, we are involving our front-line employees and, to a degree, some of our customers to help us take a more common-sense approach to how we do things. We’ll communicate the results of our review and the additional actions we will take by April 30th.
Airlines may be too protective of their employees
On the other side of the coin, here’s Oscar later in the call, responding to a question from CNN’s Jon Ostrower:
Jon Ostrower: And Oscar, in that same vein, I mean, your rival in September 2015 really focused on a creating more employee-focused culture. I’m curious just kind of to go back to the early parts of last week and your comments about emphatically supporting employees. And that statement seems to rile people up more in regards to the characterization around Dr. Dao’s behavior. I just want to kind of go back and kind of get inside your head for how you were trying to walk a line between your relations with your employees and your relations with your customer, and if you feel you got that balance right early in the week and how you kind of felt you need to make a pivot later in the week?Oscar Munoz: Thanks. Listen, customers have always been first, but I think the evolution of our company, we needed to regain the trust of our employees first before they can do that. And if you think about — your question about what’s in my head and why it was important to support our employees as well as keep customer focus is that customer service at the end of the day, is not about a policy or a procedure or a tool, it’s about values, human values, and that we cannot lose because if I lost that with that many thousands — tens of thousands of employees, we’d be in a very much more difficult situation. So as far as I look at it, it’s about values, not protocol.
United is starting to build inroads with corporate customers and business travelers
United wants to grow in Latin America
And we think there’s a big opportunity there, and that’s something that we’ll be working on over the coming years, but our partnerships are really important, and we’re looking forward to expanding partnerships, particularly in Latin America with Avianca and Copa, and we think there’s a real opportunity. But we have strong partnerships across the Atlantic and Pacific. Adding Avianca, Copa, and Azul to those relationships is going to give us the ability to give the American and LatAm a run for their money in Latin America… Well, we have opportunity for improvement everywhere, but it’s [Latin America’s] the least developed region for us. So yes, it’s the area with the most opportunity for improvement.
Yes, United is being handcuffed in terms of growth by Wall Street
Brandon Oglenski: Hey good morning and thanks for taking my questions and Oscar, appreciate the comments. Accidents happen and I think your hard-working frontline in place probably deserve a little bit more credit than all the negative media attention. So hopefully, we can put this behind us. But from an investor perspective, I think, Scott, what folks are worried about here is that we saw the capacity increase domestically in the past month, one and a half. The concern here is that maybe we’re a little bit more focused on market share than margins. You’ve benchmarked to Delta publicly. Their guidance for 2Q is a good bit ahead of you here although you are showing a lot of sequential improvement in 2Q as well. So, how can you re-ensure your investor base here that this capacity addition indeed is restructuring the network to help you capture that margin Delta and that we should be thinking this is going to be quite accretive as we move into 2018?Scott Kirby: Well, look, we used the term — I try to avoid actually market share and try to say natural share more often than market share because this is not a play to go get market share. This is really about restoring United to its natural share. And United get a lot — took a lot of accidents in the past three to four years, which caused it to lose its natural share and which hurt its financials. And you guys used to get on this earnings call and beat them up about why aren’t your financials good. And you gave them a cure for that, which was cut capacity, cut capacity, cut capacity and it just made the problem worse. And despite taking the same medicine quarter-after-quarter as the numbers got worse and worse and worse that was part of the problem when the airline was cutting capacity and taking regional jets out of places that set the network like Rochester, Minnesota and redeploying them in places like Newark to Atlanta, in order to keep capacity low. That was driving margins lower. And so I’m trying to be careful to say what we’re doing is restoring United to its natural market share, to a position it was in the past, and it’s working so far. I mean, it’s actually working faster even than I would have thought, the fact that our guidance with this cutting capacity is for RASM up 1% to 3%. And by the way, we’ve got number of issues that are driving about — our flown PRASM is actually higher than that. We’ve got some accounting issues that are going to be 50 to 70 basis points headwind in this quarter. Those are just the things that happened, but our core performance is even stronger. I mean, we just — early on, we feel really good about how well this is working. It’s logical. This is not trying to go invade someone’s hub. This is about restoring United to where it should’ve been and we had some unforced errors. And we were double faulting and giving points to the competitors, and we’ve stopped double faulting and that, I think, is just going to be getting us back to our natural market share. I don’t think it’s disruptive. I wouldn’t describe the reason that we’re doing as disruptive. We’re just returning to where United’s natural market shares. We’re going to be very careful to calibrate how it’s working and how we’re doing. We’re only a few months into this, but I tell you, we’re off to a really good start. We won’t be perfect, we’ll stumble. I mean we had a stumble last week in operations. We’ll have stumbles on the commercial side, but we feel really good about the trajectory that we’re on.Oscar Munoz: And I would just add, Brandon, and reiterate what I think I said a couple of times publicly. This is a thoughtful approach with lots of team members involved. Andrew Nocella has just joined us, and joined the team and is really in charge of most of that day in and day out. So really thoughtful, but at the same time opportunistic because it is a unique opportunity as Scott outlined that we have and the list of opportunities continues to be a fairly large one, how we do it in a thoughtful balanced way is sort of the course of the day. But I can tell you that market share is not a conversation we have in this room or with our board, it is all about margin. And so, again, I just want to reiterate that point.Brandon Oglenski: Okay. Oscar, I appreciate that. But I think you even said it publicly before this is a not a shift in long-term strategy that United is about to grow capacity now at or above GDP. This is, indeed, a shift in the network, is that incorrect?Scott Kirby: Yes, I think that’s probably correct. I’m not sure I’d say exactly that. This is not an attempt to go build an empire and go win the market share. It is an attempt to restore United to its natural position. And once there, I would anticipate we will be growing in line with GDP.
For more on this issue, listen to our podcast episode about United’s growth trade offs due to Wall Street
Delta’s aggression in fare segmentation is paying off
Basic Economy is now available in 100% of US and Canada markets, and more than 25,000 markets overall as the rollout to international markets has commenced. This has helped recapture the double-digit declines in average domestic business fares, and between Comfort+ and Basic Economy, branded fare initiatives are up 10% YOY and on track to produce more than $300 million incremental revenue.
It’s probably a nontrivial contributor to a projected PRASM increase of 1-3% for Q2. According to CEO Ed Bastian, Delta is seeing most passengers actually opt for higher priced fare bundles when presented with a breakdown of what’s included in each fare bundle:
Well, the big advantage we have, I think with Basic Economy is the fact that when people are presented with the option of buying Basic Economy and for these are people who are buying the lowest available fare, when they are actually presented with what’s the content of [each fare bundle], they are selecting something else. And that’s the real value, is to be able to define a product and then be able to match that product to what customers want. And that’s really how we have tried to de-commoditize the industry, is to demonstrate the people what the products and services are and separate them out because if we are not able to do that and we are only playing to the lowest common denominator and you wind up being commoditized.
Delta’s fleet shifts across the Atlantic and the Pacific are going to boost performance
Delta is no longer the undisputed king of US airline operational performance
Ed Bastian tried to contextualize Delta’s operational meltdown on the call:
Thanks, David. No, we are not understaffed. The storm that hit us on Wednesday was a – have the impact that, in my 20 years at the airline, we have never seen. It’s not just a storm there were 7 different thunderstorm cells that happened over a rapid fire basis. Starting early morning to the evening, there were tornadoes in the region. We had a virtual shutdown of Atlanta for the better part of the entire day. And when you couple that with the very heavy period of travel, because we are right in the middle of the spring break travel period to peak, so we had limited capacity and seats by which that we could re-accommodate those disrupted operations. It really created a significant delay in terms of the challenges that we faced. We had crews that were diverted. We had crew rotations that were broken. We certainly understand and recognized the impact that’s had not just on our crews, but also on our customers and we apologize as we did and we certainly take full responsibility for making this better into the future, but it was a function of the environment. As I said in my prepared remarks, we have a team that’s focused on changes that we could need to continue to make in better crew tracking, better crew information and contact availability, we had crews calling in from all across the system that we are literally running the airline hour by hour in terms of where crews were and getting them piece back together. And it was a very difficult process for us… Well, as I said, the big changes we are making is around technology investment. And getting better crew tracking and this is an issue that’s not just the Delta issue this is an issue for the industry as to how to minimize disruptions when they occurred. Typically, we certainly have had storms in the past, never in the middle of the summer with lack of warning that we saw. When we have snowstorms or snow events, we typically get out of the way and we let the weather past. We were not able to get out of the way. It hit us as we were right in the middle of one of the busiest travel periods of the year.