Podcast: Winners And Losers In United’s Big Aircraft Order

Listen in as Aviation Week editors delve into the nuances of United Airlines’ decision to buy 200 Boeing 737 MAXs and Airbus A321neos and what it means for the regional jet market.

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Rush transcript:

Joe Anselmo:

Welcome to the Aviation Week Network's Check 6 Podcast. I'm Joe Anselmo, editorial director.

            United Airlines gave the aircraft industry a big shot in the arm last week with an order for 270 new airplanes. United will buy 200 Boeing MAX family airplanes, as well as 70 Airbus A321neos. The new airplanes are part of a plan by United to grow its domestic capacity by 30% over the next five years. But not everyone in aviation came out a winner. United plans to stop flying 50-seat regional jets at its major hubs, marking another blow to that struggling sector of the industry.

            Joining me to make sense of all this, our Aviation Week Editor's Jens Flottau and Ben Goldstein. Ben, let's start with you, tell us about this United order?

Ben Goldstein:

Yeah, Joe. So the order was United's largest ever. It was also one of the biggest orders we've seen in the past decade, particularly in recent years. It's for 200 737 MAX aircraft. Breaking it down, it's 150 MAX 10s and 50 MAX 8s, as well as the 70 A321neos. United already had an order placed for 100 MAX 10s, so this ups their commitment to 250 MAX 10s, making it by far the largest operator of the type, which is of course the largest MAX variant.

            These planes are all due to arrive, most of them, between 2022 and 2026. And it's really going to ramp up pretty quickly. In 2023, they're going to be taking 138 aircraft, so that's really about one plane every three days. So a lot of capacity coming in.

            And at the same time as they're taking these new jets, they're going to be retiring more than 200 50-seaters. This is going to amount to a really big increase in capacity at United. And I guess the big question here is, are Delta and American going to match them?

Joe Anselmo:

So Jens, the MAX 10, obviously the largest variant in the MAX family, and a lot of people been saying for a while that it can't compete against the 321XLR just on range. So this is obviously good news for Boeing. Boeing also had a MAX order from Southwest in recent months. Are we seeing demand for new aircraft come back faster out of the COVID crisis than perhaps people had thought?

Jens Flottau:

It's a bit soon to tell, I would say. There's several different aspects here. Yes, for the U.S., domestic demand is coming back fast and probably faster than people have thought. There may also be, and that's something that we need to watch for the future after this United order, the question, what does it trigger? If United goes for this, the question is who will follow, as Ben indicates.

            Will that translate into new orders? And remember, there've been a lot of deferrals, both on the Airbus and on the Boeing side. Delivery positions that have been shifted from 2020 and 2021 into the later years. So there aren't necessarily that many positions left in the coming year. So if you want to have more aircraft and participate in that growth, then there's an incentive to start buying now.

            One last point here that I'd like to make is, obviously pricing. Boeing has a good reason to price low, and what we're hearing from the market is that they are doing that. So United for sure got an attractive deal, as did Southwest.

Joe Anselmo:

So if United got a good deal from Boeing, but perhaps pay closer to full price with Airbus, why buy neos at all?

Jens Flottau:

Well, I mean, if you're buying 70 aircraft, you do get a good discount on the Airbus side as well. But remember, there's different profiles. The 737-10 is a good domestic aircraft, good trans-con aircraft for the U.S. But if you want to go a transatlantic or deep into Latin America, then it's not good enough in terms of range. And don't forget the 321neo's also bigger.

            And then there's a big learning from the MAX crisis, which is you don't rely on one manufacturer because if things go wrong, then you're stuck, then you have a big problem. United is such a big airline that it's completely fine for them to operate two large narrowbody fleets and try to be not dependent on one.

Joe Anselmo:

Jens, let's talk about the people that aren't celebrating, the regional jet sector. Continental Airlines, which obviously became part of United, played a huge role in launching Embraer's 145 RJ into the U.S. market in the late 1990s. Now it seems we've come full circle. How bad is this for Embraer?

Jens Flottau:

Yeah, it's pretty bad, and if this becomes a trend. Obviously the problem ... The fact that United is retiring 50 seaters is not a problem for Embraer because they're not building 50 seaters anymore. But the problem is that they're not replacing those 50 seaters with Embraer aircraft, the 175, or even the 190, 195-E2s. In spite of all the scope clause restrictions that are still in place and have not changed, Embraer was still somehow hoping that they could enter the U.S. market with the E2 at some point.

            I think if this United order is an indication, that is not likely to happen, at least not on a large scale. And if other carriers are feeling under pressure to follow United and go big, then Embraer can also not hope to get orders from other carriers. Embraer has always argued that now is the time to rightsize. Place smaller aircraft into smaller markets, save on trip costs, even if unit costs are a little higher. But that's not happening, and that's bad for them.

Joe Anselmo:

So Ben, we're seeing smaller 50-seaters being parked. What does this mean for routes? Are we going to see a shift United's routes?

Ben Goldstein:

Well, yeah, that's kind of a big unanswered question. Of course, on the regional airlines side, what does this shift mean for small airports that rely on a service from 50-seat aircraft? And what does it mean for the regional airlines that operate those planes? Scope clauses limit how many 76-seat aircraft that carriers can deploy. And the economics of it suggests that they can't simply upgauge every airport they serve.

            So will some communities lose out on service as a result of a move by United to shift from 50 to 76 or more seats? Especially if other competitors copy their move, it's quite likely. Now maybe small community air service could even emerge as a topic in Washington again if this really becomes a trend. Right now a lot of these communities have maintained their service because of the Cares Act, which has extended a lifeline by requiring carriers to continue service. But that is going to expire this fall.

            So it's definitely possible that we are going to see a consolidation at different airports across the country, with a real strain on small communities that rely on this service.

Joe Anselmo:

Jens, I remember when United built a new terminal in Cleveland that was only for regional jets to funnel in and out of these smaller communities. That is closed now, completely shut down. Is this just the next step in something that's been going on for a while?

Jens Flottau:

So there has been a clear decline to be observed in the regional sector for some time. Bombardier stopped building aircraft, Mitsubishi has shelved the SpaceJet. Embraer's there on its own for now, if you don't count ATR turboprops in the U.S. market.

            And as far as the airlines is concerned, I see substantial restructuring ahead. I wonder how many of these operators will be left in the end if more airlines like United shift to mainline operations in markets that used to be regional markets.

Joe Anselmo:

Ben, 30% capacity increase, that's a lot. And over the next five years. If United's growing that fast, will American and Delta in particularly be forced to react? And if they are, could we see ourselves in danger of overcapacity in the U.S. market down the road?

Ben Goldstein:

Yeah, good question. It's a lot of capacity. I think it comes out to about 75,000 additional seats per day across United's fleet. So to put that in perspective, that's more than the four major ULCCs combined, so Spirit, Allegiant, Frontier, and Sun Country. It's a lot of extra capacity. And of course, we've seen Delta, and American also making moves to upgauge their fleets.

            So could this keep lid on fares in the near term? It's very likely. And in fact, that's what United sees right now. On their investor call recently when they announced the order, United said they expect unit costs to decrease by 8% from 2019 levels by 2026. And that's the result of a lot of savings they've enacted during the pandemic, as well as the fleet modernization and upgauging.

            But very tellingly, they don't see any improvement in unit revenues. So on the revenue side, United expects their unit revenues to actually decline between now and 2026, so no improvement there. That to me suggests they do see some overcapacity and some weakness in fares and yields. And they also are going to have to contend with really rampant competition from ULCCs. Besides the four I mentioned earlier, you have two new carriers, Avelo Airlines and Breeze, the combination of all this it's going to probably be ... There could be some overcapacity.

            Now on the flip side, if some of these carriers, the larger airlines, do consolidate their service to certain communities, maybe they decide to serve one airport in a city instead of two, then that could help keep a lid on some of these pressures. So it really depends how it unfolds. But I don't think that in overcapacity situation is out of the question at all.

Joe Anselmo:

Guys, we're running short on time. I wanted to ask you a final question. United really seems to be somewhat of an outlier as a major airline. During the COVID crisis they didn't park wide-bodies at anywhere near the rates that other major airlines.

            On sustainability, they have this innovative carbon-capture program where they're going to capture emissions, pump them back into the ground. They are ordering supersonic aircraft from Boom. They have options to buy air taxis and now all these orders. Is Scott Kirby just a great showman or is United really different?

Ben Goldstein:

I think part of it is that he is a great showman, but I also think that it's indicative of a very aggressive strategy they're taking, coming out of the pandemic. And now you mentioned the supersonic jets and their eVTOL orders. I mean, those are a little bit more conditional. There are some outs for those, and those projects may never come to fruition.

            Of course, you see such a large order they placed recently and the decision to increase their capacity by 30% from pre-crisis levels, I mean, this suggests that this company is very serious about aggressively growing. And aggressively competing against the rising threat from ULCCs, which I think is what really underpins a lot of this shift away from these smallest airplanes that are just not profitable when they're going up against Spirit and Frontier, with their really rock-bottom cost structures.

Jens Flottau:

I don't think all of this will happen, some of it will. I'm very skeptical about the supersonic plans. Mainly from a business model point of view I don't think it makes sense. I also have strong views about the sustainability aspects of this, even though United claims it will all be based on SAF. I have my doubts that that is really sustainable.

            On the other hand, I really enjoy writing about United's plans and prefer this much over the bad old days where United broken guitars and all these customer complaints. It's a different airline now. It's very interesting to watch, and it's very interesting to see how the industry will react.

Joe Anselmo:

Okay, and it's a story we'll definitely be keeping an eye on here at Aviation Week. Jens, Ben, thanks both of you for your time and sharing your insights. Also special thanks to our producer in London, Guy Ferneyhough. That is a wrap for this week's Check 6 Podcast, now available for download on iTunes, Stitcher, Google Play, and Spotify. Join us again next week for another Check 6.