United Blames Hurricane Harvey for Major Revenue Decline

Hurricane Harvey caused “the largest operational impact we’ve had in the company’s history,” and will significantly hurt its earnings this quarter, United Airlines Chief Financial Officer Andrew Levy said Wednesday at an investor conference.

United, which usually operates 410 daily flights a day from Houston, canceled thousands of flights over roughly two weeks because of the hurricane, including its entire schedule on four days when George Bush Intercontinental Airport closed. On Wednesday, United planned to operate 350 flights, and Levy said it should fly its entire schedule by Friday.

“We had to walk away from a large amount of revenue during what is an important part of the year for us,” Levy said at the Cowen and Company 10th Annual Global Transportation Conference.

In all, Levy said United forecasts it will make about $400 million less than expected in the third quarter. While much of that loss is attributable to Harvey, it’s not the only reason for the new financial guidance. Levy said United has three other issues: a problem with its Basic Economy product that has made it less enticing to customers, cheaper-than-expected domestic fares, and softness in China and Guam.

As a result, United significantly changed its third-quarter estimates for revenue per available seat mile, or RASM, which measures how much money an airline makes for each passenger it flies one mile. Earlier, United predicted RASM would be flat, year-over year. Now, Levy said, it should decrease between 3 and 5 percent.

About 1.5 percentage points of the RASM decline is directly attributable to Harvey, United said. The airline attributed one point of the decrease each from Basic Economy and cheap domestic fares, and half a point from weakness in China and Guam.

United is hopeful Houston revenues will improve soon, though it might take some time before local travel demand returns to pre-Harvey levels. In the interim, United expects to fill planes with connecting passengers. “We expect that part of the business to come back very quickly,” Levy said.

Basic Economy Issues

In other matters, Levy acknowledged United may have misjudged the market earlier this year for Basic Economy fares — relatively cheap tickets that come without some extras, including advanced seat assignments or large carry-on bags.

United had been aggressive in selling the new fares, but there was a problem. American, which has been introducing similar fares, took a more methodical approach, and for several months American didn’t sell it in many markets where United did.  But American sometimes lowered prices to stay competitive, even for regular tickets with all the normal perks.

That meant United and American might have the same ticket price, with American offering more value to consumers. In those cases, United noticed it was losing business.

“We pushed it hard,” Levy said. “We were aggressive. We took some risk, and in this case, you can look back and say maybe we could have done it this way or another way. I don’t think taking risks and failing occasionally — if you want to call it that — is a bad thing.”

American expanded Basic Economy this week, so competition with American should be less of a problem for United later this year. But other airlines, including JetBlue, Alaska and Southwest, do not have Basic Economy fares at all, and it is possible customers will chose them over United at times. If that happens, United may lose share.

Still, Levy said United remains “believers in the value of cabin segmentation.”

Overall Pricing is Soft

Levy also touched on general industry pricing trends, noting many fares in competitive nonstop markets are unusually low.

United tries not to set one-way fares at $20 or $30 he said, but it will continue to match ultra-low-cost carriers, who seek to poach United’s customers. In the short term, Levy said, aggressive pricing might hurt United’s earnings. But he said the airline has no choice.

“If you ignore it, you wake up in a few years and the next thing you know it’s a really big problem,” he said. “Look, we don’t like it. We don’t like the fare structures where they are, and we don’t like the effect it has a on short-term earnings. But this is not about making decisions for this quarter or for next quarter.”

Pacific is ‘tough’

As for the Pacific, Levy cited two problems. He noted geopolitical tensions are hurting United in Guam, where it operates a small hub. And he said pricing is weak in China — a problem because United is the largest U.S.-based airline in China by far. United soon will cut one route, a nonstop from San Francisco to Hangzhou, near Shanghai.

“It’s a tough environment in the Pacific,” Levy said.

Change to A350 Order

Also on Wednesday, United said it would alter its Airbus A350 order, first placed in 2010. Initially, United had ordered 25 A350-900s, with deliveries beginning in 2016, but in 2013, it changed it, preferring 35 of the larger A350-1000s, with deliveries beginning in 2018.

Now, Levy said, United wants the A350-900, but it will take 45 of them, with first delivery in 2022. The A350-900 — a plane roughly equivalent to the Boeing 777-200ER — is a “better fit and size” for United, the airline said. When the first A350s arrive, some of United’s 777-200ERs will be 25 years old and ready for retirement.

United earlier wanted the A350-1000s to replace its Boeing 747-400s. But after United placed that order, it chose to replace the 747s with another aircraft, Boeing’s 777-300ER. The 777-300ERs started flying in February, and United will retire its last 747 later by year-end.