United Airlines (UAL) will cut annual expenses by $2 billion and begin moving some larger planes from Asian routes to help boost profits. The changes announced on Tuesday come as investors have grown increasingly frustrated that the world’s largest carrier—at least until the upcoming merger of American (AAMRQ) and US Airways (LCC)—financially underperforms its domestic peers.
United also said it will begin returning cash to shareholders in 2015, although it did not specify whether that meant a dividend such as that recently resumed by Delta Air Lines (DAL) or some other payment. The airline plans to increase its pretax income by two to four times over current levels by 2018. “We can do better, we can do more,” United Chief Executive Officer Jeff Smisek said during an investor presentation at the New York Stock Exchange.
An income boost is expected to come from ancillary revenue, the kind of bag, food, and seat-assignment fees that have helped U.S. airlines return to profitability over the past five years. United plans to target $3.5 billion of ancillary revenue by 2017, $700 million more than its prior plan. One way to do that is by better collating and analyzing data on customers so United can tailor its product and service offerings and sell more of them.
“The marriage of big data and this mobile platform … becomes incredibly powerful,” said Scott Wilson, United’s vice president of e-commerce and merchandising. The airline has squeezed 30 percent more revenue this year from 2012 through “dynamic pricing” of its Economy Plus section, which has more legroom, on a flight-by-flight basis. United can gain about 20 percent in sales next year on that seat pricing, Wilson said. “I think we are just scratching the surface on ancillary,” Smisek said.
Last month, United missed its quarterly financial targets and told investors that it was revamping its cost structure to boost profitability. That weak report made analysts particularly eager to hear about how the airline planned to overhaul its finances—and how it aims to execute its plans, one management area in which the company has lagged its peers. “We are very positive on these stated goals, but where UAL has run into problems over the past two years is in execution of its stated plans,” S&P Capital IQ (MHFI) analyst Jim Corridore wrote in a client note during the presentation. “We would like to see some traction on these plans.”
The airline also announced several changes to its network, mostly in shifting several large aircraft out of its Tokyo hub. The company will quit its Seattle-Tokyo flight—as Delta builds an Asian hub from Sea-Tac—and begin a second daily Tokyo flight from its Houston hub, along with a new flight from San Francisco to Chengdu, China, next year and a new flight from San Francisco to Taipei. Several planes from Asia will move to trans-Atlantic flights, with new service from Houston to Munich and summer service to Madrid and Edinburgh, Scotland. United also plans to reduce the number of its system’s 50-seat regional jets in favor of larger, 76-seat aircraft.