June 29, 2021, 11:53 a.m. EDT

United Airlines goes all in with ‘Next’ fleet renewal, promises $2 billion in savings

Claudia Assis

United Airlines Holdings Inc. on Tuesday promised to say goodbye to most of its cramped, older regional jets and replace them with fuel-efficient, amenity-laden jets that can carry more people — and more profits.

The plan, which the company dubbed United Next, comes less than four weeks after the airline made a splash by planning the return of commercial supersonic flights, and amid a recovery of sorts for the air travel industry after it came to a near-standstill with pandemic-related restrictions.

The new planes would offer premium seating, meaning the company would be able to sell the more profitable, rarely discounted first-class and business seats.

Tucked in the announcement, United also said it’s hoping for about $2 billion in cost savings, including $1.3 billion savings through “workforce efficiency.” That would be achieved by streamlining management layers and “productivity improvements” through automation and other changes, the company said.

Wall Street was skeptical: United (NAS:UAL) shares fell about 0.5%, contrasting with modest gains for the S&P 500 index (S&P:SPX) . Shares of direct competitors American Airlines Group Inc. (NAS:AAL) and Delta Air Lines Inc. (NYS:DAL) were mixed, with American down 0.9% and Delta up 0.2% in midday trading. The U.S. Global JETS ETF (PSE:JETS) edged lower.

The news boosted shares of Boeing Co. (NYS:BA) , which would deliver some of the planned newer planes alongside Airbus SE (OTC:EADSY) . United plans to buy 200 of Boeing’s 737 Max aircraft, consisting of 150 737 Max 10s and 50 737 Max 8s.

The Airbus order is for 70 A321neo aircraft, and the plan is for United to retire more than 200 single-cabin, regional jets, which mostly fly from the company’s Midwest hubs.

The newer narrow-body airplanes would offer passengers more space, bigger overhead bins, and upgraded entertainment options, in addition to the possibility of premium seating. Premium-priced business and first-class tickets offer the bigger margins for airlines.

The narrow-body planes also offer flexibility, as they are able to fly short domestic flights as well as some international travel. Fuel economy is another plus.

United had fallen behind competitors in narrow-body fleet composition.

The company’s investor presentation on Tuesday showed that legacy peers’ fleets are 27% comprised of narrow-body jets; United’s was 4%. By 2023, when the fleet renewal is planned to be completed, that share would be around 33%, the company said.

“Given 416 of UAL’s 850 aircraft are over 20 years old, the order fits a replacement need and is not surprising,” analyst Sheila Kahyaoglu said in a note Tuesday.

The promised cost savings also include shaving off about $700 million in non-labor costs, United said, including by reducing its real estate footprint. Fuel efficiency would also be a factor: the fuel cost per seat on a Max is around $16, compared with $36 on an older regional jet.

United said it expects adjusted capex of $4.5 billion in 2021, $4.2 billion in 2022 and $8.5 billion in 2023.

United shares have gained 50% in the past 12 months, and 22% this year. That compares with gains of around 41% and 14% for the S&P in the same periods.

Link to MarketWatch's Slice.