ARROGANT AND TRUE - PART 2 (January 2023)

#ScottKirby Does Not Disappoint on UA's 4Q Call

In UA's 3Q call, UA's CEO spoke about the ULCCs and their operating model as “doomed” in the face of rising fuel and labor expenses that will make it impossible to offer the rock-bottom fares their customers expect. Fast forward

Kirby (SK) opened the call talking to a deck on UA's thinking about where they see the industry is heading. SK: "we think there’s ample evidence that there have been structural changes in the airline industry that set it up for higher margins than we had pre-pandemic".

Expanding on 3Q: SK: "I believe a world where ULCCs pay their pilots significantly less than us, yet they can still hire/retain pilots, and can somehow operate with previous staffing and utilization levels is just a null set. It’s not a realistic scenario". In Q&A: "I’m saying, NOT IMPLYING, [that this scenario will play out]

Those comments might be considered arrogant. There is truth in every statement.

Old Term - Inverted Thinking - Same Expected Result

On UA's call, the term cost convergence was used 9 times. In 2008, I wrote a paper at MIT with Dr. Peter Belobaba and Gerassimos Tsoukalas titled: Cost Convergence in the US Airline Industry: An Analysis of Unit Costs 1995-2006. [Attached below]

It was written after more than 50% of the industry's capacity had filed for bankruptcy. If the network carriers could get their costs down, then it would blunt the growth of the lower cost sector. Remember: The Low-cost Carriers Shall Not Inherit the Earth? With court assistance, the lower cost sector did see their market incursions slow.

UA offered #CostConvergence 9 times on the call. Circa 2023.

1. "we believe cost convergence among all airlines as well as supply challenges = higher industry margins"
2. "we think that cost convergence may drive revenues higher than 0.49% [of GDP]"
3. "slide 9 the money slide. You can have whatever view you want about capacity. But what really matters is cost convergence. It’s already happening and I’m pretty sure it’s going to continue"
4. "with cost convergence, ... I’d bet that the REV:GDP ratio is going back to the mid .5s"
5. "GL: "Well, Conor, there’s no question there’s been an industry reset on costs, ... and the cost convergence ahead"
6. "cost convergence -- it’s up to other airlines to decide how to price the product. But I’m pretty sure it’s not up to them what’s happening to their cost structure .. It is changing, ... happening already"
7. Baker: "On the topic of cost convergence, I think you said that the ability for discounters to maintain a significant wage arbitrage is narrowing or impaired"? Kirby: "I’m saying, NOT IMPLYING"
8. GL: "demand and supply and cost convergence [revenue manage higher]
9. "AN: "cost convergence ... positive TRASM domestically ... And it’s a really good setup"

Now higher costs = higher margins. Structurally changed thinking. Will lead to blunted lower cost sector growth.

Just sayin'.