America Airlines – United looks abroad for post-pandemic profit boost
In Asia, competition was fierce before the pandemic. Now pressure is easing as some carriers refocus on domestic flying and consolidation takes others out of the mix.
In China, United’s largest Asian market, competitors’ “capacity in the last 12 months has been redirected toward their domestic networks,” Grant says. “Two of the big three Chinese airlines said they managed to make a profit in the third quarter on a 90 percent domestic network. For Tier 2 Chinese carriers—operating from Hangzhou and other second-tier cities—they have never made a profit on international services. It is likely they’re going to reflect long and hard on re-entering a market that’s unprofitable for them. That level of capacity and competition may not re-appear.”
That doesn’t mean China, the world’s fastest-growing aviation market, will be an easy one for United. “The growth in China in the last five to 10 years was the outbound market,” Grant says. “The problem for U.S. and European carriers is there is considerable consumer loyalty to the national airlines and the localized product, which makes it hard for the likes of United, Delta and American to compete.”
While Asia and Europe are traditional strongholds, they won’t likely recover until next year, Nocella said. “We expect emerging international markets to be stronger in the near term,” he told analysts. In the meantime, United is diversifying its network to take advantage of new opportunities, increasing service to Latin America, India, the Middle East and Africa.
Before the pandemic, United got about 38 percent of its revenue from international flights, compared with 28 percent for Delta and 26 percent for American, Baker estimates. But Nocella says United’s profit margin on international flights before the pandemic trailed domestic by 2 to 3 percentage points.
He’s banking on turning that around. In addition to bankruptcies and consolidation, COVID-19, as with most downturns, is forcing airlines to ground older or less efficient aircraft that either burn too much fuel or have too many seats.
“We’re counting the number of 747s and A380s that have been pointed at the United States that are no longer in the flying fleets of many airlines around the globe,” Nocella told analysts. “There are simply fewer wide-body aircraft in the fleets around the world. In particular, there are fewer of the very large ones with very large business-class cabins. And so that gives us a lot of confidence the world is going to be very different on the international front over the next cycle than where we had been.”