United Continental (NASDAQ:UAL) spent much of the past decade as the laughingstock of the airline industry. A series of customer-service gaffes and mediocre service led to erosion of its once-loyal customer base. Delta Air Lines (NYSE:DAL) capitalized on the opportunity to poach some of United's most valuable customers, enabling it to consistently outperform the other major airlines in terms of unit revenue and profitability.
However, United Airlines has dramatically improved its reliability and customer service in the past couple of years, and it's starting to rebuild its reputation. Its efforts helped it post strong profit growth last year. Now, United plans to go on the offensive to win back business travelers by dramatically expanding its premium-seat inventory.
Addressing a long-standing disadvantage
The first big change United is planning is the introduction of Bombardier's CRJ550 to its regional fleet starting later this year.
Today, United Airlines has more than 300 50-seat regional jets that lack first class or extra-legroom seats, compared with only 255 larger regional jets with up to 76 seats that offer the full range of premium seating options. For comparison, Delta has about 325 large regional jets and has reduced its 50-seat jet fleet to fewer than 150 aircraft. United's pilot contract would make it difficult to add more 76-seat jets to its regional fleet, but the result is that it offers an inferior passenger experience, especially for high-paying business travelers, on many regional routes.
The CRJ550 is a specially modified version of the CRJ700 designed to fix that problem. The CRJ700 is typically configured with 65 to 70 seats, but the CRJ550 will have just 50 seats, along with a reduced maximum take-off weight, allowing it to comply with United's pilot contract.
Beginning in the second half of 2019, United Airlines will add 50 CRJ550s to its fleet. Each will be outfitted with 10 first-class seats, 20 extra-legroom seats, and 20 regular coach seats, which means it will be easy for business travelers to score upgrades. The extra space on the aircraft will be used for a self-serve beverage and snack station for first-class passengers and luggage closets to allow more carry-on bags to be brought on board. The CRJ550s will be based in Chicago and Newark, New Jersey, and deployed on routes with particularly high premium demand.
United Airlines will also increase the number of first-class seats from eight to 12 on its Airbus A319s and from 12 to 16 on its A320s over the next few years. That will match the number of first-class seats Delta Air Lines already has on its A319 and A320 fleets.
Capturing premium trans-Atlantic demand
In another major change, United Airlines will retrofit 21 of its Boeing 767-300ERs over the next two years to increase the number of premium seats. In addition to installing 22 of its new Premium Plus premium economy seats on these planes, the carrier will increase the number of lie-flat business-class seats from 30 to 46.
To make room for this big increase in premium seating, United will slash the aircraft's seat count from 214 to 167. Virtually all of the reduction will come from the regular economy cabin, which will shrink from either 135 or 138 seats today to just 52 on the new version. The number of extra-legroom economy seats on each 767-300ER will stay roughly flat at 47.
United Airlines will deploy the first retrofitted 767s on its Newark-to-London route. This route carries a huge number of business travelers who are willing to splurge for better seats. United's D.C.-to-London and Chicago-to-London routes also seem like good candidates for premium-heavy 767s. Some of its routes to Paris could also fit the bill. These key European destinations have seen a surge in capacity from budget carriers in recent years, driving down economy fares, so replacing regular coach seats with premium seats seems like a sensible idea.
Check out the latest earnings call transcript for United Continental.
Can United continue to keep costs down?
In total, United's fleet modifications will add more than 1,600 premium seats to its inventory over the next few years, a roughly 10% increase. These changes will help the carrier continue to grow its unit revenue. First, premium fares are dramatically higher than standard coach fares. Second, the introduction of the CRJ550 could help United regain corporate travel market share from Delta by enabling it to offer first-class service in certain smaller markets.
The real question is whether these moves will hurt United Airlines' efforts to hold down nonfuel unit costs. Last year, adjusted nonfuel unit costs dipped 0.2%, and the carrier projects that adjusted nonfuel unit costs will be flat or slightly down once again in 2019. However, in recent years, United and its peers have offset other cost increases by squeezing more seats onto their airplanes.
Now, the seating density of United's planes is set to go into reverse starting in late 2019 and accelerating in 2020. In addition to the 767 retrofits, United is also decreasing the number of seats on several other widebody models as part of its Premium Plus rollout.
It will be much harder for United Airlines to keep nonfuel unit costs flat or better when it's shrinking the number of seats on dozens of aircraft. But if United can find enough offsetting cost savings to limit its nonfuel unit cost growth to 2% or 3% in 2020, the revenue benefit of higher premium seat inventory should easily outweigh the increase in unit costs, enabling further earnings growth.