Why is United Airlines Splurging $30 Billion on New Planes Amid Pandemic?

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In terms of revenue, the global airline industry was thrown twenty years back in time in the aftermath of the Covid-19 pandemic. The combined revenues of the airline industry in 2020 was a mere $328 billion, which is equivalent to the industry revenues in the year 2000.

In a year-on-year comparison, the revenues in 2020 was only 40 percent of the revenues recorded in the previous year.

According to management consulting company McKinsey, the airline industry will be challenged for years to come and is not expected to return to 2019 levels until 2024.

Massive Boeing 737 MAX Order

However, United Airlines, America's third largest carrier, surprised industry watchers by announcing a plan on Tuesday to buy a massive haul of as many as 270 new planes from Boeing and Airbus.

United Airlines
A United Airlines flight (For representational purposes only). Pixabay

United is buying 200 Boeing 737 MAX and 70 Airbus A321neo jets, in a deal worth $30 billion at list prices, Reuters reported. United CEO Scott Kirby says the purchase will accelerate the company's business to meet a resurgence in air travel.

Is that resurgence around the corner? And will it be strong enough to justify enormous investment?

Business Vs Leisure Travel

According to McKinsey, business travel will only slowly recover, and by 2024, the segment will only recover about 80 percent of the pre-pandemic levels.

Leisure travel is expected to recover faster though. However, as the consulting firm notes, leisure travelers do fill up seats on an airplane but their financial contributions in net marginal terms are 'negligible, if not negative.'

United ceo replacement
United Airlines

"Most of the profits earned on a long-haul flight are generated by a small group of high-yielding passengers, often traveling for business. But this pool of profit-generating passengers has shrunk because of the pandemic," it notes.

United's Plans

With the new orders, United's order book swells to 500 new, narrowbody aircraft including 40 in 2022 and 138 in 2023. the airline has the option to receive the remaining deliveries between 2024 and 2026. It can also convert some of the MAX 10 orders to other variants.

United will be able to replace its aging Boeing 757-200 fleet when it takes delivery of the planes, but it's not clear if it will also replace its 757-300s. United had not retired aircraft during the pandemic unlike other airlines.

The company said on Monday said it is likely to earn a pre-tax profit in July. It's shares remained largely unchanged after the massive purchase plan was announced.

Investment by airline companies at this time is likely based on the calculation that latent air demand will push ticket prices upwards in the near future. "When demand for air travel returns, it will likely outpace supply initially. We see a glut of latent demand of people eager to travel. It will take time for airlines to restore capacity, and bottlenecks such as delays in bringing aircraft back to service and crew retraining could lead to a supply–demand gap, resulting in higher short-term prices," says McKinsey.

United Airline had received $10.5 billion in government aid during the pandemic. It has pledged to to create 25,000 unionized jobs as part of the new plane purchase, according to Reuters.

Related topics : Coronavirus