Earlier this year United Airlines and Boeing made a big deal about a multi-billion dollar order for 65 new 737-700 aircraft. In yesterday’s investor briefing the company announced that the order would be deferred and converted off of the smaller Boeing jet. Four new 737-800s will be delivered in the second half of 2017 while the other 61 frames will be from the 737 MAX family with delivery dates not yet assigned.
— Seth Miller (@WandrMe) November 15, 2016
The decision to defer the order so soon after placing it is a rather bizarre one. The shift to larger planes was billed as part of a move to increase total capacity and to draw down some of the smaller regional jet flying while improving the passenger experience. From the release announcing the deal:
The new 737-700 aircraft will enable United to continue utilizing larger, more efficient aircraft as the airline reduces the size of its 50-seat regional fleet. United expects to have fewer than 100 aircraft in its 50-seat fleet by the end of 2019.
Apparently the incremental capacity increase is still forecast to occur, just without the larger aircraft. United will focus on improving utilization of the existing fleet (i.e. flying the current planes more hours each day) and take advantage of the new, higher density 777-200 domestic configuration for further increasing capacity in the near-term. And none of that is particularly good news for passengers.
At the time of the order in March it was suggested that Boeing sold the planes ridiculously cheap to counter the possibility that Bombardier might score a win with the CSeries. In announcing the deferral United indicated it would adjust its expected CapEx approximately $1.6bn, essentially confirming the cut-rate price on the 73G order. In deferring the order CFO Andrew Levy essentially stated that the unit costs of the 737-800 were far more to United’s liking than the –700. That makes sense given the low incremental cost differential between the two, but doesn’t speak to how or why that view changed in the past 8 months.
United says deferring 61 737-700s will save $1.6 billion in cap ex. And $1.6 billion divided by 61 equals $26 million. Hmm.
— Stephen Trimble (@FG_STrim) November 15, 2016
It also doesn’t address the challenge United faces in the 100-130 seat jet market. The investor briefing included a slide showing how Delta Air Lines is often able to put more frequencies of mainline jets, albeit sometimes smaller ones, on routes, offering up more flexibility for business travelers on various routes (Newark-Atlanta was chosen in the slide). United has fewer total flights but more seats.
The –800 sized planes are able to keep costs down but with the higher seat count the frame doesn’t really fit in all these high frequency markets, at least not without skewing the network capacity numbers higher. Yes, United has increased use of the Embraer 170/175 family of planes but those top out at 76 seats, leaving a sizable gap in the company’s smaller mainline fleet plans. The existing 73G fleet easily has another decade of flying in it and used models are relatively cheap to acquire these days, but executives have shied away from committing to anything on that front.
Ultimately this move leaves me asking more questions than I can reasonably find answers for. If the 73G isn’t the right sized plane for United then the CSeries likely isn’t either. But something has to fill that gap in the fleet. Or not. But if not then why order the planes in the first place. And also was the CSeries ever really a serious consideration? Does it becomes a serious option now with the deferral and Delta‘s significant order, giving increased stability to the product line and setting an even lower price point for the type? How will Boeing manage its delivery obligations in the near-term for 737NGs given that it now has some 60 slots freed up in the next couple years? And will we ever really see the end of the 50-seat jets at United?
I think the answer to many of these questions is “new senior management team” and giving Munoz’s new crew a bit of time to shift things to look like they want it to be. But it is hard to know exactly what that will be or when it will happen.
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