UPDATE 15:16 CST: SEA-NRT cancellation date and IAD-MAD times added
At its Investor Day Conference in New York City this morning, United Airlines announced that as part of its plans to increase long-term shareholder value, it will “optimize” its network in the next year to help “reduce costs, increase revenue and enhance profitability while delivering competitive reliability and excellent customer service,” according to a Press Release issued earlier today.
A full recorded webcast of the presentation and Q&A session, which was held at 8:30 AM EST, is available for playback for listeners at United’ Investor Relations page.
According to the press release, United has launched initiatives to reduce costs by $2 billion annually, increase pre-tax earnings by 2 to 4 times its current level and generate sufficient cash to begin allocating capital to shareholders by 2015. United also hopes to earn an additional $700 million in annual ancillary revenue earnings in future years, up from its current levels.
These announcements are not surprising given United’s lackluster Q3 2013 financial performance. While virtually all of its competitors recorded healthy Passenger Revenue per Available Seat Mile (PRASM) and yield increases for the quarter, United’s revenue and yield results remained either flat or reflected marginal improvements over the 12-month period, despite having three years to prove that its merger synergies with Continental Airlines are finally delivering on ROI expectations. United blamed its dismal revenue performance on its RM system, claiming that lower-yielding inventory buckets were opened up further out in the booking curve to sell more seats, and thereby achieve higher load factors at lower yield levels.
Moreover, United’s cost control results were unimpressive given that its operating expenses stayed constant year-over-year, when in reality, they should have been lower now that the one-time merger implementation costs have subsided.
Aside from high-level discussions pertaining to cost-reduction initiatives and revenue improvement plans, United announced some shake-ups to its international long-haul network. The following route changes are expected to take place, pending government approval:
Trans-Pacific: swap out Seattle to Narita for second Houston – Tokyo flight
United, as well as Delta, have experienced sagging transpacific yields over the past few years. With numbers declining by nearly three times the amount in the same quarter as 2012, its no surprise that United’s major surgical areas will hail from its TPAC and intra-Asia networks.
The biggest, although not surprising, move will be the elimination of its VERY legacy Seattle to Tokyo route on January 16, 2014. United has been present in this market since 1983, as it was one of its first trans-Pacific routes, but the need to maintain its metal between the Pacific Northwest and Japan has largely lost its business case. For starters, competition for a medium-sized market is pretty rife: Delta Air Lines has been building up its transpacific gateway at Seattle, adding 747-400 service on its existing SEA-NRT flight and adding an extra service to Tokyo Haneda airport just recently. Delta has been bolstering feed onto these services by building up domestic trunk routes from SEA, in addition to receiving plenty of connecting traffic thanks to its codeshare with Alaska Airlines, the main hub carrier at SeaTac. United, meanwhile, does not operate a domestic hub at Seattle.
Secondly, United also has maintained a 777 crew and pilot base at Seattle specifically dedicated to this flight. While the carrier had original plans to deploy a 787-800 on this route starting in February 2014, the new aircraft will require a different set of crews with the specified skill sets to operate the Dreamliner on SEA-NRT. From a labor expenses perspective, this likely would have created problems and further inefficiencies. The SEA-NRT 787 swap was supposed to occur in November 2013, but was delayed until February of the following year, therefore adding skepticism over whether United’s commitment to the future of the route remained certain.
Finally, United operates a transpacific immunized joint venture agreement with All Nippon Airways, which flies a daily 787 between Seattle and Narita, further rendering the futility of remaining in the market by adding excess capacity and diluting yields for both carriers. United can still share revenue on this route thanks to the terms of the JV.
Seattle’s loss, however, will be Houston Intercontinental’s gain. United currently flies a daily 2-class Boeing 777-200 between its largest domestic hub at IAH and Narita, and has applied to commence a second-daily service between the two cities on March 30, 2014. Narita is a slot-controlled airport, and the landing rights allocated to Seattle will likely be transferred to launch the second daily Houston service next spring. As a hub-to-hub route, Houston – Tokyo is suitable for another 777 that can be filled up easily with O&D and connections. The schedule has already been loaded into the GDS with the second flight timings listed as United flights 001 and 002.
UA001 IAH0900 – 1235+1NRT 777 D
UA007 IAH1055 – 1430+1NRT 777 D
UA006 NRT1600 – 1400IAH 777 D
UA002 NRT1855 – 1655IAH 777 D
Finally, United has its new SFO-Chengdu, China route going live in a few months, along with plans to re-launch SFO-Taipei in April and hopes of receiving rights to fly from SFO to Tokyo Haneda airport next year, once the landing slot award becomes available after American drops its New York JFK – Haneda flight. At the conference, United hinted that it plans to look for opportunities to launch service to secondary markets in Asia, just as it has in Europe. With more 787s on the way, look for those opportunities to come from San Francisco.
Intra-Asia: chopping Bangkok to Tokyo and reducing Seoul to Tokyo
As a corollary to its transpacific long-haul adjustments, United plans to drop its 747-400 service from Tokyo to Bangkok, Thailand. UA flights 837/838 are a continuation of its daily San Francisco – Tokyo Narita flights operated on a highly-dense 747. Similar to Seattle – Tokyo, the Tokyo – Bangkok market is very saturated with competition fragmented among five carriers: Thai Airways, All Nippon Airways, Japan Airlines, Delta and United. Thai commands over 40% of the daily market share, utilizing two daily A380-800 aircrafts on the same route, while JAL uses a mix of 777s and 787s and ANA uses 777s and 767s. The ANA flights between Tokyo and Bangkok are covered under its JV with United which, again, render the futility of UA sending its 747 metal on the NRT to BKK route. Although Thai is a Star Alliance partner, it does not codeshare with neither ANA nor United on this route.
Delta, similar to United, deploys a 747-400 on its own Tokyo – Bangkok route as a continuation of its LAX – Narita flight. However, unlike United and its fellow Star Alliance partners, Delta is the only SkyTeam carrier serving the Tokyo – Bangkok corridor, justifying the need to stay present in this sector on its own metal as it lacks a local Japanese partner to operate the route for them. Delta has also made significant product upgrades and overhauls to its 747-400 fleet in recent years to stay competitive with the Asian carriers, whereas United has not made any investments in its 747 product, especially in the economy class cabin. Arguably, it has the most sub-par offering of the 5 airlines in this medium-haul, and relatively premium-oriented market.
Elsewhere in Asia, United will down-gauge its daily flight from Tokyo Narita to Seoul Incheon airport from a 777 to a narrobody aircraft, although the substitution aircraft has yet to be named (likely a 737). Again, NRT to ICN is a highly saturated market among several stronger, legacy Asian competitors such as Asiana, Korean Air, JAL and ANA, each with double-digit market share on the route compared to United’s mere 4%. Delta recently exited the Seoul – Tokyo 5th freedom market, opting instead to focus on overflying Japan to serve the Korean market, as evidenced by its recent plans to launch a nonstop Seattle to Seoul flight. Moreover, low-cost carrier competition in the form of Korean carriers Jeju Air and Eastar Jet have recently entered the Seoul – Tokyo sectors, likely eroding yields for United.
With these changes in place, United’s intra-Asia network from Tokyo Narita will be scaled down to Singapore, Guam and Seoul. It recently exited from Tokyo – Hong Kong earlier this year. However, under the JV with ANA, United can still enjoy revenue sharing agreements with routes from Tokyo onward to Bangkok, Delhi, Ho Chi Minh City, Hong Kong, Jakarta, Manila and Taipei. With a slew of connecting opportunities to North American cities via United, Air Canada and ANA, Star Alliance still has the right balance between leveraging connections over Japan across the Pacific. Although de-emphasis on Japan is still in effect, it is by no means a lost cause.
Trans-Atlantic: summer seasonal changes and new service from Houston to Munich
The network announcements hailing from the Atlantic side of the coin are significantly more optimistic, which, again makes sense given that United’s transatlantic performance has been relatively stable over the past few quarters. Alongside its plans to launch a new summer seasonal route from Chicago to Edinburgh, Scotland, United will similarly add another summer seasonal route from its Washington Dulles hub to Madrid, Spain in 2014. United formerly operated this flight as part of a Joint Venture agreement with Aer Lingus from 2009 to 2012, albeit operated on Aer Lingus metal, but the route performed poorly in the off-season. Moreover, it was a highly controversial move as United management received negative backlash from unions for “outsourcing” this route to cheaper labor by having Aer Lingus cabin crews operate the flight. The route will fly from June 5, 2014 thru September 4 on a pre-merger Continental 757-200 configured for transatlantic services with the following times:
UA163 IAD1745 – 0740+1MAD 752 D
UA164 MAD1135 – 1430IAD 752 D
United will also step up its game in the hot New York – London market by going all-out widebody on its 5 daily Newark Liberty – Heathrow services during the peak summer months. Currently, United flies 5 daily services between the two airports, but 3 of those 5 flights are operated on international 757s in a 2-class configuration with only 16 premium seats. While frequency is important, product and capacity also require constant revisiting considering the competitive and changing dynamics of the NYC – London market. Recently, American Airlines deployed its much larger Boeing 777-300ER series planes, with a newly revamped First and Business Class product, on some of its JFK – Heathrow flights. Its transatlantic JV partner, British Airways, is also sending its newest 787 planes to Newark as one of the first markets to receive the Dreamliners.
Also equally impactful will be the fruition of the Joint Venture agreement between Delta and Virgin Atlantic Airways, which goes live on January 1. Once that takes place, United and Star Alliance will have the smallest level of market share capacity on the NYC-LON sector at a mere 12.1% in the peak summer months, whereas a combined Delta + Virgin will maintain roughly 35% of the share and a combined British Airways + American will own over 50%. United touted that with the all-widebody services, it will essentially double the number of flat-bed seats offered on its Newark to Heathrow flights, which should boost its competitive position with a greater number of premium seats available. It’s a relatively low-risk move that is suitable for the peak season.
Finally, the biggest news announcement across the Atlantic will be a new daily service between Houston and Munich, Germany, operated on a pre-merger Continental 767-400 slated to start on April 24, 2014. This will be United’s fourth transatlantic service from its Houston hub, which is still reeling from losing its nonstop link to Paris in 2012. In a highly-political move, United trimmed capacity at IAH by as much as 10% after neighboring Hobby airport won rights to build a Federal Inspection Services facility enabling it to allow tenants, namely Southwest Airlines, to fly international routes from HOU. United’s reaction to this decision, which was extremely childish and frivolous especially in the aftermath of a distastrous system cutover from months before, was campaigned as a “punishment” move to IAH, even though the routes that United cut were unprofitable and on the chopping block as is.
The Munich flight makes logical sense given that it is a Star Alliance hub for fellow joint-venture partner Lufthansa. Houston is ripe for nonstop connections to another European Star Alliance hub aside from its existing services to Frankfurt, and Munich will open up additional connection opportunities for traffic on both the North American and European ends, which is why a high-density 767-400 is perfectly configured for the route.
Schedules, which have already been loaded into the GDS, are as follows.
UA104 IAH1610 – 0950+1MUC 764 D
UA105 MUC0925 – 1415IAH 764 D
United is taking pages out of American’s book, which is strategic
These network changes reflect similar behavior by American Airlines, which is pragmatic for United with the current market conditions. Leveraging existing joint venture partnerships and flying to markets where there are business justifications is the right approach for the interim.
When United is able to shore up its balance sheet, only then will it be able to think of new creative routes to emulate recent moves by Delta Air Lines. However, United also has the ace up its sleeve with the 787. The decision to de-emphasize Narita and focus more on building on its existing strengths is truly a right move.
Some experiments will still need to be tested: the SFO to Taipei route has already been delayed by a year, indicating that advanced bookings may not have been as robust as predicted and placing skepticism over whether the 777 is the appropriate aircraft for the route. The Chengdu route also has to prove its ability to fight the battle, but secondary cities in China are booming and the market conditions are favorable for United to be successful here. Also interesting to see will be how United’s recently launched service from Denver to Narita performs over the course of the year once it celebrates its inaugural birthday next spring.
Aside from network adjustments, its now time for United to act, and it has its work cut out for it.