United is chasing premium travelers with a massive aircraft order. What investors need to know

Published Wed, Jun 30 202111:27 AM EDTUpdated Wed, Jun 30 202111:39 AM EDT

United Airlines is chasing high-paying customers with bigger planes, and a lot of them. United's new aircraft order — 150 of Boeing 's largest 737, the Max 10, 50 of the best-selling Max 8, and 70 Airbus A321s — is its biggest ever. It is also the largest order by a U.S. carrier in about a decade, a clear boost to Boeing and Airbus. But more than anything it shows how United is shifting its attention from survival (with the help of billions in federal aid ) to a post-Covid rebound and future growth. The order isn't just about the planes themselves, which will bring United's orderbook for narrow-body jetliners to about 500, 300 of those to replace aging and less-efficient planes. The order is the backbone of a multi-billion-dollar glow-up United is plotting to win back high-paying business travelers who have largely been grounded since the pandemic began. The airline also wants to steal some from competitors, like American , JetBlue , and most certainly Delta , which had made higher-paying customers central to its strategy before the pandemic hit. United's shares are up more than 21% this year through, roughly in line with the NYSE Arca Airline index, which tracks 16 airlines in North America, South America and European budget airline Ryanair. But the sector is facing headwinds lately as the Covid delta variant casts doubts about whether lucrative international travel will soon return. Despite the recent moves, running an airline often means playing the long-game, with aircraft ordered years before they're delivered. Here are five takeaways from United's big reveal: More 'premium' seating United executives say compared with its current fleet the new planes will fit more first-class and extra-legroom seats on board, which fetch a premium compared with standard coach. By 2026, United says it will average 53 of these "premium" seats per departure in North America, a 75% increase over 2019. That higher-paying passenger is crucial for United as it seeks to revive revenue after losing $7 billion last year, though analysts expect losses to narrow this year. Chief Commercial Officer Andrew Nocella told analysts on Tuesday that just 30% of United's revenue in 2019 came from its standard coach cabin. Cabin refresh The new Max planes will come with new amenities like big overhead bins, in-seat power and new seat-back entertainment systems with Bluetooth audio. It's a change of course for United, which eschewed seat-back entertainment for some newer planes. Those will be retrofitted with the new systems, the airline said. CEO Scott Kirby's former employer, American, has taken screens off many narrow-body aircraft, arguing travelers would use personal devices to watch movies and other entertainment it provides, while they've been a mainstay for most Delta mainline planes. Some of United's new aircraft will replace about 200 single-class regional jets, which Kirby told investors on Tuesday, "our customers dislike." That means the airline would reduce its reliance on the regional airlines it contracts to operate those planes. United will also retire its Boeing 757-200 jets. In total, United expects to add 25,000 jobs by 2026, including pilots, flight attendants and mechanics. By the airline's own admission, United was due for a makeover. It has the oldest fleet of any U.S. airline, about 16 years old, according to Jefferies. Cabins on planes that fly in North America are inconsistent, with varying amenities and configurations. "We're going to correct that for once and for all," United's Nocella said at a splashy debut for the airline's first Boeing 737 Max 8 and the new cabin, held at the carrier's hangar at its Newark Liberty International Airport hub. Growing with bigger planes By using larger jets, United can more easily grow at congested hubs. The carrier expects the largest planes in the order, the Max 10 and the A321neo will help it expand in airports like Newark and San Francisco International, which pre-pandemic were important business travel hubs. United said its reliance on single-class regional jets has prevented it from improving its performance. In an investor presentation, it said it has 104 seats per aircraft on average, compared with 114 for other large network carriers and 175 for ultra-low-cost airlines like Frontier or Spirit . United says it will expand capacity 4% to 6% a year through 2026, most of that through using larger aircraft, adding more seats at hubs like Newark, San Francisco, Denver, Chicago and Los Angeles. Spending to save United said the fleet renewal will ultimately help it cut costs. Regional jets are "high unit cost aircraft to fly. They often spill demand. And by the way, with fewer seats in this product, we often close our inventories really early," Nocella told investors. United says the order and its new strategy will help it cut non-fuel unit costs by 8% by 2026 versus 2019. Wall Street analysts expected the order but some had questions about the costs, just as the airline is trying to recover from the pandemic. United said it expects its adjusted capital expenditures to rise from $4.2 billion next year to peak at $8.5 billion in 2023, most of that in aircraft costs, and then slowly slide. JP Morgan airline analyst Jamie Baker called it "sobering." "The CAPEX cycle United is about to undertake should not be taken lightly," wrote MKM Partners analyst Conor Cunningham. "It is not totally clear how the company plans to fund these deliveries, but we believe using cash as the primary form of payment would be wise." CFO Gerry Laderman told reporters on the sideline of the event that it would likely be a "combination of financing and cash." He said United's net debt level — $22 billion at the end of March — would likely be relatively flat through 2023, but that financial ratios could be better than pre-pandemic levels by 2026, as the plan rolls out and it retires older aircraft for more fuel-efficient ones. Upbeat on business travel demand At list prices, the order would be worth north of $30 billion but airlines generally get steep discounts, especially for a sale of this size. Rob Morris, head of consultancy at aviation data firm Cirium estimated the order was worth about $15 billion. It's still a significant price tag and understandable that CEO Kirby was so upbeat about the return of business travel. While that segment is down 60% compared with 2019, that's better than the 90% decline over two years ago earlier in 2021. Kirby said he thought business-travel demand, as well as long-haul international travel, another pillar of United's business, would eventually climb back to 100%. The aircraft order and new cabins "vaults us to the leadership position in the aviation industry," Kirby told reporters. "We have the winning hand. We just have to play it right," he said.

United shows its first Boeing 737 Max 8 at its hangar at Newark Liberty International Airport.

Leslie Josephs | CNBC

United Airlines is chasing high-paying customers with bigger planes, and a lot of them.

United's new aircraft order — 150 of Boeing's largest 737, the Max 10, 50 of the