United Airlines (NASDAQ: UAL) expects to drive down growth in operating expenses starting next year by replacing smaller aircraft with larger ones, primarily on domestic routes.
Third quarter cost per available seat mile (CASM), excluding fuel and non-core expenses, increased 2.1% year-over-year to $9.80, the company reported Oct. 15. Two years ago, the airline set a target of flat CASM through 2020 and now expects the compounded three-year growth rate for non-fuel unit costs to be just 0.3%, even with plans to raise employee compensation and invest in products to improve customer experience.
The cost-management strategy is heavily dependent on getting better economies of scale and the best way to do that is to drive more passengers through United's hubs with larger planes, President Scott Kirby said on United's earnings call with analysts the next day.
"We plan to take advantage of increasing gauge," he said, referring to the width of a plane's fuselage. "We have large hubs in big cities across the country and because of that we should be the airline with the highest gauge. But at this point we aren't."
"In fact, United is seven to eight years behind our largest competitors on gauge growth, with approximately 13% fewer seats per domestic departure compared to Delta. As our fleet mix shifts to a larger percentage of larger gauge mainline aircraft instead of regional aircraft, we begin closing that gap in earnest, starting next year," Kirby said.
United expects to have about 3% more seats available per departure by the end of 2020 and continue to swap in larger plans into the middle of the next decade, he added.
Larger planes will also mean more space for cargo customers.
United is scheduled to take delivery of 65 new aircraft next year, including 28 Boeing 737 MAXs, 20 70-seat Embraer 175LLs, and 15 Boeing 787 twin-aisle planes. Wide-body planes typically are used on international routes, but United does operate some 777s and 787s on domestic routes, such as Newark, New Jersey, to Los Angeles.
The 737 MAX deliveries are contingent on the Federal Aviation Administration recertifying the planes for commercial service after Boeing Co (NYSE: BA) completes software fixes to its flight control system to prevent faulty pilot overrides' that led to two deadly crashes in the past year.
Next year's upgauging will mostly take place in the last quarter, Chief Commercial Officer Andrew Nocella said.
United has hubs in Chicago, Denver, Houston, Newark, San Francisco, Los Angeles and Washington, D.C. When a wide-body plane is put on a domestic route it helps airlines feed, and pull, international cargo at their hubs.
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