CEO Scott Kirby Has Big Plans For United Airlines

"United is a four-year-old startup embedded inside a 98-year-old airline.” United Airlines CEO Scott Kirby says. That “startup” launched on Feb. 29, 2020, when the coronavirus showed up in Italy. “I got on the phone with our CFO that day and said, ‘This is a global pandemic. Let’s go raise money.’”

In an exclusive interview with ATW, Kirby said that moment set the tone for the company that continues to this day. United raised the money it needed by early March 2020 and put in motion a plan to not just weather the crisis, but to emerge bigger and better.

“Two things you can do: You can make excuses or quickly accept the bad thing that’s happened and figure out how to attack it and come out stronger on the other side,” Kirby said. “We were the only ones who believed in a full recovery of travel demand. That was the light-bulb moment that this was the time for us to go all in on a big bet on recovery because we didn’t have to be right—we just had to be not totally wrong when everyone else was shrinking.”

JP Morgan senior airlines analyst Jamie Baker agrees. “Scott was the first airline CEO to confront COVID head on and build a plan for the airline to survive,” he said. While others furloughed pilots and permanently grounded fleets, United reached a deal with pilots to ensure they could eventually return to service, “but without the operational mayhem that plagued some others,” Baker added.

United’s goal is lofty: to become the biggest and best airline in the world, which Kirby defines as the most profitable, the airline of choice for customers, and the place employees most want to work. If you get the culture right, everything else will take care of itself—a page torn from Herb Kelleher’s Southwest Airlines playbook.

“The biggest thing we’ve done is change the culture,” he said.

Despite the acrimonious public posturing endemic to heated labor negotiations, Atmosphere Research analyst Henry Harteveldt detects a shift in attitude at the airline.

“Their employees appear to be very committed to the company and to helping customers,” he said.

But can United be the best?

“When you aggregate what investors and passengers look for in an airline, we would argue that United currently is firing on all cylinders,” Baker said.

William Swelbar of the Swelbar-Zhong consultancy takes a more skeptical view.

“It is hard to imagine a US airline delivering the product of a Singapore [Airlines] or an Emirates,” he said. “Big airplanes make improved products available for sale. That doesn’t easily translate into being the world’s best.”

From a “world’s most profitable” standpoint, the airline still has some way to go to be world-beating. United reported a fiscal 2023 operating margin of 6.2%—lagging Delta Air Lines and nowhere near the big numbers of the Atlanta-based powerhouse. United is on climb-out, with its 2023 unit revenue growth outperforming the rest of the US industry, except for Delta, by 1.7%.

During the most recent earnings call, Cowen analyst Helane Becker asked how United intends to achieve 12%-14% margins in 2026. United achieved peak profitability with a 13.6% operating margin in 2015, and 9.9% just before the pandemic began.

“The strategy is working, and we’re very confident in an upward trajectory to both earnings and margin,” United CCO Andrew Nocella responded.

With input and labor costs rising—United negotiated a $10 billion Air Line Pilots Association (ALPA) contract in 2023 and a flight attendant collective bargaining agreement is forthcoming—this is an even more daunting challenge.

Kirby shrugs it off. “We believe the industrywide cost pressures will wind up as a pass-through, much like fuel has been in the past,” he said.

UNITED NEXT

The engine powering Kirby’s ambitious goals is the company’s sweeping United Next strategy.

One pillar of the plan is unlocking the global network. United has long been considered to have the best US network, with its seven hubs in the largest business and population centers, but it has been far from optimized.

Even as international travel was virtually at a standstill, United looked beyond America’s borders for growth. United targets a 50:50 domestic:international split; in Q4 2023 it was 62% domestic and 38% international.

The company’s international footprint is undergoing rapid expansion, with 17.4% more international departure seats in Q1 2024 vs. Q1 2019, and 34 new international routes since January 2022, according to OAG data. United is the nation’s largest provider of international capacity in all regions except Latin America and the Caribbean.

“They are doing some creative things, in particular with long-haul flying,” Harteveldt said. “Who had Newark to Faro, Portugal, and first-ever US nonstops to Manila, Philippines, and Christchurch, New Zealand, on their bingo card?”

Analyst Bob Mann of RW Mann & Company points out that United undertaking this flying on its own metal is a significant advantage, unlike American Airlines, which uses oneworld alliance partners for much of its long-haul lift.

“You control the controllable of the operation to a much greater degree than having to rely on synthetic providers or a joint business arrangement,” Mann said.

Some of these new international destinations are relatively low-risk, flown by older, paid-off Boeing 757s, 767s and 777s.

While international draws much of the limelight, United is progressing toward achieving what Kirby calls its natural share domestically, where it ranks number four in passengers.

“We’re probably only in the third inning of that domestic journey, but the thing that’s been amazing about it is we’ve been leading the industry in RASM, even though we’ve had the fastest growth,” Kirby said.

United is flying the largest domestic schedule in its history, with the most  growth coming from its mid-continent Denver mega-hub, which is now the country’s third-largest airline hub. Constrained hubs like Newark, San Francisco, Chicago and Los Angeles are growing via upgauging aircraft rather than adding flights. OAG data indicates United’s domestic capacity was up 4.6% in Q1 2024 compared with Q1 2019, while Delta and American have remained nearly flat.

“We’re the only airline in the country who basically has all of our network that’s profitable,” Kirby said.

OPTIMIZE THE FLEET

United’s unprecedented fleet renewal, another pillar of United Next, is the largest in the history of commercial aviation.

“The foundation of United Next is aircraft—big aircraft,” Swelbar said. Since the beginning of 2021, United has ordered 605 new aircraft, on top of previous orders for 294. The record orders for 150 Boeing 787 widebodies to replace aging 757s and 767s obviously play the biggest role in international growth. But the narrowbody order replacing 50-seaters for mainline is what’s really driving unit costs down and unit revenue up.

“What we’re doing is essentially getting rid of 300 regional jets and replacing them with what will ultimately be 500 mainline, narrowbody aircraft,” Kirby said.

In 2019, United averaged 104 seats per North American departure, among the lowest in the industry. By 2027, the carrier expects that number to jump more than 40% to over 145 seats.

United removed an order for 271 Boeing MAX 10s from its internal fleet plans the day after a door plug blew off an Alaska Airlines MAX 9 minutes into a Jan. 5 flight.

“We didn’t dither with it,” Kirby said. “It’s frustrating that Boeing is behind, but we’re still adding a hundred-plus narrowbodies a year and two widebodies a month starting later this year.”

Some analysts urge caution with the upgauging campaign regarding revenue management and debt service.

“It causes you to act differently when you have a surplus of capacity than if you have a scarcity of capacity. And so, the pricing of those seats becomes very critical,” Mann said.

The significant CapEx of approximately $9 billion in 2024 and total debt of $29 billion leaves Swelbar concerned.

“Orders were necessary, but a massive order is still in question given that United faces progress payments every day and a zero percent interest rate environment is history,” he said.

With caveats, Baker breathes a bit easier. “Free cash flow is expected to mostly fund CapEx over the next few years, but higher margins will be necessary to stimulate the excess cash flow for absolute debt reduction,” he said.

United CFO Michael Leskinen said the supply chain deliveries allow it flexibility to moderate the rate of growth and bring down CapEx.

DE-COMMODITIZING

United Next also includes a move that would have been anathema to Kirby’s younger self of 15 years ago, when he was president at US Airways: De-commoditizing the product. This is a lesson he has adopted from Delta, and Kirby is not ashamed to admit it.

“I respect Delta a lot. It annoys me because they’re really good and they’re competitive,” he said. “They help prove that customers will choose based on the brand and what they like about the airline. We’ve learned that from Delta, and we copy that.”

So United is adding free seatback IFE, stylish new cabins, and more premium products, and is pushing toward industry-leading on-time performance and reliability.

Analysts are mostly onboard with the plan.

“You cannot talk about any CASM advantage anymore. You have to shift to a revenue-focused airline that justifies a revenue premium versus other airlines. They’re going to have to figure out how to command an even higher premium at some point than Delta appears to be able to,” Harteveldt said.

Swelbar adds: “Honestly, no airline can continue in perpetuity in a commodity product world.”

United enjoys the highest premium seat growth among its US competitors—increasing 32.4% since 2019, OAG data shows. In the second half of 2023, United’s revenue from premium products was up almost 20%—outpacing top-line revenue growth of around 11%. This has translated into the highest year-on-year yield increase of 3.7%, topping Delta’s 2.4%.

The airline’s operations are trending in the right direction. On-time performance has achieved the best six-month period in company history, averaging 82% of flights arriving within 15 minutes of schedule. The constrained Newark hub, epicenter of a massive summer 2023 meltdown, has made a turnaround. The fourth quarter was the best ever for Newark, with a rate of 89% of all inbound and outbound United flights arriving within 15 minutes of schedule. The much-maligned airport where United dominates has become the fifth-most on-time large US airport.

The improved performance is reflected in higher J.D. Power scores, where United ranks third in customer satisfaction in the first/business-class segment. Net Promoter Scores (NPS) still lag, with the carrier ranked last among its “Big Four” competitors. United attributes a 9.2-point NPS increase to aircraft equipped with the new signature interior found in all new deliveries and retrofits. Protracted supply chain snarls, however, have slowed the new interior rollout.

UNITED VS. EVERYONE

It would be a mistake to believe United is only gunning for the top of the particular market.

“You can’t pretend to be just a low-cost commoditized business or pretend just to be high-end in a business where we have 8%-10% profit margins. You have got to do both,” Kirby said.

United freely admits its form of innovation is imitation and then doing it better.

“I’m probably the only airline executive that has read every single one of my competitor’s earnings call transcripts for 20 years,” Kirby said.

The LCCs and Southwest are perfect examples of Kirby copying their playbooks and removing their competitive advantage. During COVID, United was the first mover in permanently removing change fees, and its network carrier competition was forced to follow suit. On the face of it, this was a shrewd move with the unpredictable booking curve wrought by the pandemic. The permanent reality is a direct shot over the bow of Southwest, removing one of that carrier’s main unique selling points.

The LCCs have drawn out Kirby’s competitive spirit the most. He was the first to change their narrative from former profit machines into permanent money losers, deriding them as “Ponzi schemes” and “bad business models.” He said LCCs’ “cost convergence”—as their expenses rise closer to those of legacy airlines—will make it impossible for them to grow and compete, in effect dooming them to unprofitability and worse.

Ironically, higher costs are helping the global carriers more than hurting them in erasing the ULCC’s former cost advantage.

“Our unit costs in 2023 were up 17.8% versus 2019,” Nocella said, while ULCC unit costs were “expected to be up 25% on average.”

Kirby is using the inflationary environment as a cudgel against Spirit Airlines and Frontier Airlines.

“ULCC’s offered low fares that were better than us, so we needed to compete with that,” he said.

United’s basic economy offering, which allows a personal item but no carry-on bag on domestic flights, is more akin to an LCC’s than are the Delta and American offerings, which include a carry-on.

ULCCs need repeat customers, Kirby said, but unhappy customers will defect to United’s superior product, network and loyalty program—and pay an incremental premium for it.

While United’s competitors downplay the importance of basic economy in favor of premium, United touts it.

“Domestic basic economy revenue was up nearly 20% in the fourth quarter versus last year,” Nocella said. “It remains a key component of the future. We continue to believe we can add gauge to domestic flying while maintaining strong unit revenues.”

These market dynamics are unprecedented, in Swelbar’s view.

“Cost convergence is a competitive tool, whether to lower costs to meet the competition or to raise costs to a level where the competition cannot be meaningfully profitable, if profitable at all,” he said. “There has never been an alignment of scenarios playing out in United’s favor like what has and is playing out.”

Despite the backdrop and risk of billions of dollars of capital investment, record-smashing labor deals and debt, Kirby doesn’t convey concern with the inevitable downcycle. He seems to relish it.

“We have to prepare United for the unknown unknowns,” he said, echoing the famous quote from former US defense secretary Donald Rumsfeld.

It’s a high-stakes poker game, and Kirby seems energized by the chance to turn crisis into opportunity.

“I want us to be in a position where financially we double down during the crisis,” he said. “We have more chips on our side of the table, better cards in our hand and everyone else has to fold. And we win in good times and bad times.”