United Airlines Boeing 737-900
United now believes full-year 2017 consolidated capacity will rise 2.5% to 3.5% year-over-year, up from previous guidance of 1% to 2% growth. Domestic ASMs are now expected to increase 3.5% to 4.5%, up from previous guidance of 1.5% to 2.5% growth. American plans to grow system capacity just 1% in 2017 with no domestic growth, while Delta has promised a hard 1% cap on ASM growth this year.
Speaking March 15 at the JP Morgan Aviation, Transportation and Industrials Conference in New York, United CEO Oscar Munoz acknowledged that the announcement of higher capacity growth in 2017 has “created a little bit of angst” among investors. But he defended the added growth as “the right thing to do,” and said the change from prior guidance was the result of his new management team, led by president Scott Kirby and CFO Andrew Levy, having a full opportunity to review United’s network and operations after joining the Chicago-based airline in August 2016.
Munoz said a bottom-up review, which has now been completed, led United’s management team to conclude the airline was not utilizing its aircraft as much or as efficiently as it could. “You really lay equipment down at your cost,” he explained, noting that the higher capacity would be operated without adding new aircraft to United’s fleet plan. “We’re not buying new aircraft,” he said.
Munoz said the higher growth, particularly in the domestic market, is part of United’s strategy to offer more connecting opportunities for passengers at its hubs. Kirby has said United ceded too much of the domestic market to rivals while focusing on international flying.
Explaining the previous guidance, Munoz said United had placed too much emphasis on a “cultural philosophy that said you have to be the discipline masters around capacity.” While capacity discipline will remain important, the added growth in 2017 is the result of “unique opportunities” uncovered by the United management team’s review, he said.
The 2017 growth will be “highly accretive,” Munoz said, noting United has also lowered its 2017 CASM growth guidance to 5.6% to 7.2% from 6.6% to 8.2% previously. “It’s rational beyond belief,” he said, telling investors he wanted “to allay the fears that we’re just shooting from the hip.” The decision to increase 2017 capacity growth was reached after “thoughtful study,” he said.
“This is not shoot-from-the-hip, testosterone-driven activity,” Munoz said. “It’s driven purely by analytics.”
Munoz added that United is “very, very bullish about our near-term bookings” and expected second-quarter year-over-year PRASM growth to be in “positive territory.”
JP Morgan analyst Jamie Baker told Munoz that the prospect of “perpetual perpetuity of increased capacity … really has people worried,” and asked the United CEO to give investors an assurance that the latest capacity increase is a “one time” initiative. Munoz declined to do so, but promised to remain disciplined. “In a network of our size and magnitude, you’re always going to have opportunity” to increase aircraft utilization and therefore capacity, Munoz explained.
“We’ve slowly began to regain trust from investors and you can’t lose that trust again,” Munoz said. “We have to prove to you that whatever we do makes money … We’re going to prove to you that we can create margin-accretive growth.”
Aaron Karp email@example.com