United seeks to placate investors, but what will change?

United hosted an investor call yesterday to outline its plans for the next “cycle” of changes, essentially doing its best to placate Wall Street and show what will come as the first moves initiated by new CEO Oscar Munoz. And, quite frankly, it was a dud. Almost nothing interesting or revealing announced, but we can expect to see a few changes along the way.

Operations

Improvement on operations is key to getting the company back on track and that led the presentation during the call. That’s good news for customers, assuming the company can deliver on the on-time promise. Numbers are definitely getting better month by month but there is still room to improve. Among other things, this improved reliability is expected to reduce costs as fewer passengers are accommodated on alternate carriers and to also reduce the number of spare aircraft and AOG time for the fleet. This is a noble goal but hopefully the company proves that it can maintain the basic operations before trying to squeeze the schedule too much. There is significant potential to see things collapse rather than improve if there are misses along the way.

"We'll take away extra planes we have for operations (to generate more revenue), leaving us in a predicament when something bad happens."

— Stephan Segraves (@ssegraves) June 22, 2016

Ancillary Revenue

Just how much are the “good” seats worth on board? United expects to realize $16-17 per passenger on average ($2.5bn total annually) by 2018 in what the company calls “Customer choice revenue, ” revenue from ancillary products including premium cabin, Economy Plus, and entry level fare upsells and not including bag, change and booking fees. Of that, roughly $750mm will come from premium cabin up-sells and Economy Plus. Part of this will be realized through expanded sales channels of those upsell options but expect that it also likely means increased prices on some of the products. Bundling of the ancillary products is also expected to contribute to additional revenue gains.

“Basic Economy” fares are expected to contribute $150mm annually by 2018 thanks to passengers buying up to a higher fare rather than the basic one. Delta has reported success on this front (though not quite to that magnitude). JetBlue has also said that the incremental value realized from its fare families has exceeded predictions. United hopes to follow.

Many forget that @united had major revenue mgmt software troubles in mid-2013, and UA pricing went wacky.

— justinbachman (@justinbachman) June 21, 2016

The MileagePlus program is expected to contribute an additional $300mm annually thanks, in part, to “enhancements to improve customers’ ability to redeem miles” and $200mm from a new revenue management software implementation. Jim Compton spoke positively on the new RM kit, noting that it is in testing today for limited markets. The carrier has blamed RM systems in the past – 2013 was particularly bad – and once has to wonder just how many of its proverbial 9 lives have been consumed on that front.

Hub/Route Structure

Wall Street seems to love building airline route networks and recently it was suggested that the company should adjust its operations. Munoz spoke to that, suggesting that every hub is under the microscope. Specific goals are being drawn up for each market and those will be different for each of the hubs. The presentation includes lots of positives for Newark, San Francisco and Houston. Chicago is moderately positive. And then there are Los Angeles and Dulles. While it is hard to necessarily see success through shrinking further those hubs appear to be most at risk of such adjustments.

Munoz also made mention of the shrinking domestic network capacity and, along with that, hub share and PRASM relative to the industry, a measure of premium passenger loads. The company hopes that adding flights back in at hubs and “fixing” the domestic network will see the premiums return but that’s an uphill battle for the company; the competition is strong. There is also hope that Polaris will drive some increases in market share and premium yields. On the plus side, international PRASM relative to the industry has improved in the past 5 years, so that’s good for the company.

What’s changing?

So, what will actually change? From a customer perspective actually very little. Operations should be more reliable. Hopefully. And some up-sell offers will be more expensive or bundled. Perhaps the most notable immediate change for passengers will be that the post-flight email survey will change.

"I am dumping the current survey program. It is awful." Too complicated, not actionable. –@United CEO Munoz. #PaxEx

— Seth Miller (@WandrMe) June 21, 2016

I agree that the survey is mostly crap, but it is also hard to believe this is a major effort worth calling attention to for the investment community.

But, overall, it seems that the call ended with rather insipid promises and talk of more waiting as customers and investors wait to see what comes of Munoz’s reign.