United Airlines Will Retire 21 Aircraft, Blaming Plunging Demand

Blaming plunging demand from the US federal government and between Canada and the USA, United Airlines will accelerate the retirement of 21 aircraft, a move CEO Scott Kirby claims is evidence of how nimble United has become.

United Airlines Will Retire 21 Aircraft Early To Address Falling Demand, High Maintenance Costs

United Airlines has over 500 aircraft on order, but many of those aircraft are intended to replace existing aircraft (like the 23-year-old A319 I wrote about earlier today). However, the pace of aircraft retirements is not set in stone. If demand is up, United may keep older aircraft operational longer? If demand drops, an alternative to deferring new aircraft is to accelerate the retirement of old aircraft.

That’s exactly what United is doing. Kirby couched the aircraft retirement announcement in his rather candid assessment of how travel demand from both Canada and the US government has dropped:

It started with government. Government is 2% of our business. Government adjacent, all the other consultants and contracts that go along with it, probably another 2% to 3%. That’s running down about 50% right now, so a pretty material impact in the short term. I’ll talk about what we can do about that in the medium term.

And we’ve seen some bleed over to that into the domestic leisure market. Good news is that international, long haul, Hawaii, premium all remain really strong. We have seen government and some low-end consumer leisure weakness, which also appears consistent to me with a lot of other data that I look at. We’ve had a fuel price benefit from that, but and our internal costs are also better. You put all that together, and we now expect to be at the low end of our guidance range.

Unless I’m missing something, I don’t see a correlation between government travel and low-end consumer weakness, except as a vague indicator that the economy is cooling. The short-term drop in government flying certainly appears linked to efforts by the Trump admisntration ot downsize the size and scope of many federal agencies.

The response, per Kirby, is to retire 21 aircraft ahead of schedule:

We didn’t put in a payout, but we expect to be at the low end of our guidance range. So what do we do in response to that? At United, we looked at that and said what we’re doing, one of the things that we’re doing is we’ve early retiring 21 aircraft. That’s something that will be cash positive this year. We’d have to spend $100,000,000 on engine overhauls this year alone for those airplanes.

It will be CASM positive. Those are our most expensive aircraft. We built a plan. We told all of you, we built a plan with optionality and flexibility that if we see short-term headwinds, we can make short-term responses. And that 21 aircraft, by the way, sort of correlates with what we’ve seen from the government.

Kriby further reflects on the nature of the drop in demand for air travel, pointing out a “big drop” in Canadian traffic, at least going to the USA.

We’ve already started the process of where that capacity is coming out, a lot of it transborder, big drop in Canadian traffic to go into the US so it’s going to come out in government markets where we’re seeing less demand. And we’re also going to cancel redeye flying. Utilization flying is generally unprofitable at airlines even in good times, and it’s really unprofitable in bad times.

Interesting that these are “bad times” and that redeyes will be cancelled (we’ve reached out to United for more info on what specifically Kirby was referring to in cancelling redeyes). It’s not a surpise that Canadian demand to the USA is dropping though, (just listen to President Trump mock Canada and Premier Rob Ford of Ontario fire back…).

We’ve also asked United what specific aircraft are being retired early. United’s oldest aircraft include the Airbus A319, A320 plus the Boeing 757, 767, and select 777-200 aircraft.

CONCLUSION

United Airlines will retire 21 aircraft early to address falling demand from Canada, the US federal government, nad to address weakness in the domestic leisure market. The two-fold takeaway is that United is able to adjust its fleet size due to current demand not only by deferring new orders but by retiring older aircraft more quickly. Secondly, United confirms that it is seeing a slowdown in demand, though at this point it has not re-adjusted its earning projections downward.