United Airlines is not a perfect proxy for the US consumer, its passengers skew wealthier, more corporate and more internationally oriented than the population as a whole. However in terms of market, that kind of customer is the US customer as publicly-listed companies (aside from dollar stores) increasingly cater to the middle class and above.
With that in mind, airline bookings provide an unusually timely view of discretionary spending. United’s latest earnings call suggests that its customers remain willing to spend, and are increasingly directing that spending toward convenience, productivity and experiences.
Here are some comments from today’s earnings call:
“We observed minimal to no negative impact on demand from higher price points, a trend we see continuing.”
— Andrew Nocella, Chief Commercial Officer
That is the clearest takeaway. United has been raising fares to offset higher fuel, labour, maintenance and airport costs, yet management says it has detected almost no corresponding reduction in demand.
That does not mean the American consumer is completely price-insensitive. It indicates that United’s particular customer base still has enough income, savings or corporate support to absorb higher prices.
“Our customers increasingly desire a better travel experience, and we believe they will continue to pay reasonable prices for it.”
— Michael Leskinen, Chief Financial Officer
I think there is something industry-specific happening here. In the discount carrier boom, it was a race to the bottom but customers got sick of the bare bones approach to flying and decided they could pay higher prices for better services.
In terms of the comment, consumers may be more selective, but United is not seeing a broad retreat from discretionary spending. Instead, customers appear willing to concentrate spending on products they perceive as worthwhile.
“Close-in business travel was exceptionally strong in Q2 with contracted business revenues flown up an impressive 27% year-over-year and bookings up 30%, led by technology, financial services and professional services.”
— Andrew Nocella
The acceleration in business travel is another sign that the economy remains on solid footing, particularly in higher-value service industries. It’s a good sign of higher business investment overall and proof that the post-pandemic hangover is over.
Close-in bookings are especially important because business travellers tend to purchase nearer to departure and pay substantially higher fares. Strength in technology, finance and professional services also suggests that corporate travel budgets are becoming less restrictive.
“I think you’re correct in the last few quarters, the large corporates have accelerated well above the smaller corporates, but not by a lot, they’re just above.”
— Andrew Nocella
The recovery is not confined to the largest companies, although they are now leading it. Smaller and medium-sized businesses are also travelling more, according to United, but their growth has been slightly slower.
That points to a broadly improving corporate customer rather than a surge driven by a handful of multinational companies.
“Although to give you an idea, it’s still 5 points of our load factor lower than it used to be pre-COVID. So if corporate travel continues to accelerate and close that gap with basically an 80% yield Premium versus Leisure, that’s a significant amount of upside in the plan.”
— Andrew Nocella
Business travel has strengthened sharply, but it has not fully returned to its pre-pandemic share of United’s traffic. That leaves room for further growth.
The economics are particularly powerful because United says corporate passengers generate yields roughly 80% higher than leisure passengers. Even a modest normalization in business travel could therefore have an outsized effect on airline revenues.
“Premium revenues were up 16.4% and Premium PRASM up 11.6% in the quarter. RASM specific to the Polaris and Premium Plus cabins was up even more at 13.6% in the quarter.”
— Andrew Nocella
I have been writing about the big change in airlines for awhile towards catering to premium. Affluent consumers remain a major source of strength. Demand for United’s premium cabins is growing faster than the airline’s overall capacity and remains strong on both domestic and international routes. That’s no surprise given the stock market and aging demographics.
I think there is a secular theme with upper-income consumers continuing to prioritize travel and experiences.
“Main Cabin RASMs were up 11.5% in the quarter, this is the second quarter in a row where we’ve seen Main Cabin RASM positive after years of below average performance at an industry level.”
— Andrew Nocella
RASM is revenue per available seat mile and this line shows that strength is not restricted to first class and business class. Revenue per available seat mile in the main cabin also increased by double digits. That’s not enough to offset a 20% increase in costs due to fuel but it shows some demand resilience.
United is benefiting from premium travellers, but ordinary economy passengers have also continued booking despite higher fares.
“The buy-up rate to the standard premium Polaris ticket is actually — I’m not going to give you the number, but the number is high. In fact, it’s higher than I expected by a lot.”
— Andrew Nocella
Customers are also voluntarily buying more expensive versions of United’s products. One of the reasons I’ve liked airline stocks for awhile is that they’ve figured out how to funnel people from the ‘lowest fare’ into paying extra, and this marches all the way up to first class.
“The appetite for American consumers to travel overseas seems really high to me, whether it’s Southern Europe or Japan or anywhere else around the world. I think the desire to explore is growing.”
— Andrew Nocella
United ultimately sees greater growth potential internationally than within the mature domestic market. Americans continue to demonstrate a strong appetite for long-distance travel, particularly to Europe and Asia. Once again, I think this is driven by newly-retired boomers but the strong USD certainly doesn’t hurt.
Taken together, United’s comments describe a US customer who is still spending but expects value in return. Business travellers are returning, affluent leisure customers are upgrading, economy demand is holding up and international travel remains aspirational.
There are undoubtedly weaker pockets of the US consumer, and United’s passenger mix will not capture them well. But among employed, corporate and upper-middle-income Americans, there is little evidence of a sudden retrenchment. The customer may be more selective, but they are still willing to pay for time, comfort, connectivity and experiences.
This article was written by Adam Button at investinglive.com.
