Pre-webcast music for United's Investor Day - All I Do is Win by DJ Khaled.

Presented without comment...

United giving a "safety briefing" before investor day -  effect is lost to those on webcast.

Oscar Munoz kicking things off today for United.

Oscar speaking optimistically - this is much more to motivate the troops than it is for United's investors

Oscar mostly skating by things at a high level - you get the sense that he's going to let Scott Kirby drive the bus on the overview of the commercial strategy. I would bet that even after a year plus in office, airline investors probably trust Kirby than they do Munoz, or at least assign Kirby more credibility..

"We have a damn good balance sheet"

Good to see Munoz articulate a vision of United being the best airline for customers, employees, and investors. Shades of Johnson & Johnson's credo.

And now we're over to Scott Kirby to go over network and fleet strategy.

Scott Kirby:

"We (United) have the highest potential network of any airline in the world."

One note on United's lagging earnings vis a vis Delta and American - the refleeting effect on CASM (eliminating smaller RJs) and RASM (adding first class and premium economy) is very real and United still has that dividend to enjoy in the near future.

United has hubs in the five largest local markets in the country, plus two of the most premium (Denver and Houston)

"This network (United's international network) is already the best in the world" - Kirby

Amongst multi-hub airlines, Lufthansa has an argument, same with maybe China Southern, but he's probably right.

Let's talk about United's hubs:

United says that the goal is to build domestic flying. Scott talks about the philosophy of building United around international flying with just enough domestic capacity to feed it. Post consolidation and Open Skies, the international environment is less profitable now and the domestic market has more. The underlying structure point made by Kirby is really interesting. There's a lot of inertia in a huge business and I wonder how much of United's underperformance in the last 5 year is less domestic exposure. 

Let's talk about hubs contd.

Newark


- Should be the premier Atlantic gateway, and is the only true connecting hub in  NYC.
- United's share of NYC market down to 26%. How much of that is growth from international carriers, how much is from Delta's growth?
- Kirby contrasted AA's PHL hub with Newark, looking at Philadelphia's 45% connecting traffic and smooth banks as a model to follow.
- The most profitable hubs have the highest percentage of connecting revenue.

- United is trying to get more connectivity from smaller cities in the Northeast (used Erie, Pennsylvania), thinks it isn't getting its fair share 

- Newark has 35% connecting traffic for United

- Scott Kirby says that there's no reason we can't make Newark a connecting hub switching from rolling to banked. Banks aren't going to peak in the same way as Philly either, as smaller peaks should offset congestion. Kirby thinks that United's operation will improve at Newark after re-banking.

- Newark's schedule is worse for the local market than JFK.

- Kirby talked about death spiral in local market based on United's focus on international routes.

Chicago


- Fewer notes here than Newark

- Didn't realize that American had a bunch of non-EAS destinations in Chicago not serrved 

- American has more connectivity than United despite being 100 flights per day smaller, United plans to counteract this by introducing omni-directional banks and increase connectivity

Denver

- United's most profitable hub (woah)!

- It's position here is partly driven by declining cost per enplanement, and highest percentage of connecting revenues

- United is planning even more growth in Denver


Houston


- Still weak because of Latin America


Los Angeles


- United is no longer #1

- Scott Kirby has talked about "re-committing in Los Angeles" to improve connectivity and get more gates. I remain skeptical. 


Dulles


- Expensive hub but will survive so long as Reagan perimeter exists. 


Overall Punchline


United expects $600 million in bottom line improvement from network improvements in 2020.



Re-fleeting is great for United. Boosting average aircraft size to 119 seats by 2020E from 105 at 2015E drives $700 million in profit improvement, and then increasing first class seats by 1.7 percentage points (of total seats) and Economy Plus by 0.9 points will drive $300 million. Re-fleeting is [Donald Trump voice] yuuuuuge [/Donald Trump Voice] for United.

Here comes basic economy from United, matching Delta . This all looks good except for the part where United is going to retract elite benefits for customers traveling in Basic Economy. That's going to be a bad look for lower level corporate travelers that have a metrics driven corporate contract that they are governed by. More broadly, I like the moves on product segmentation from United including stuff on personalized experiences and improving customer data. Younger customers are less driven by elite status, so you need to own them in other ways.

I'm not 100% sold on Polaris still, but the new United Clubs look excellent. As a United high elite flyer (recently switched back from American), these look great. Now all United has to do is bring the new club to Boston!

Newark Terminal C is quietly evolving into a really-nice facility post-security. If they could give the pre-security a facelift and fix some of the cramping issues, it could be a really, really nice setup

Really interesting inside baseball stuff here with United's revenue management system:


- Built in 1997, so aging, named Orion

- Demand for products w. same restriction isn't independent anymore

- forecasts for United aren't hugely accurate on small numbers (most connecting markets)

- Orion is a black box - analysts hand-manage 2/3 of flights. 

- Orion has very limited history, 


Between improvements in forecasting and expanded history United thinks it can generate 2-4 percentage points of improvements and $900 million in bottom line earnings.

Operational Improvements are interesting here - 6% drop in narrowbody turn time by minimize gate bags near end of turn (how does this jive with Basic Economy banning carry ons?) and working to reduce cancellations and long term delays (in part by improving fleet health). 

Overall, an interesting session from United but nothing ground breaking +/- the Basic Economy details and the color on the Newark hub. Once again, I'm cautiously optimistic on United's strategy which is a position I've been in for a while now. I think they're doing good things on the network and fleet sides, and I love the moves on revenue management. Scott Kirby, in my opinion, will be a home run for United hands down.

Thanks! We'll send you an update as soon as a new conversation starts.