United Airlines reported that its profit margin shrunk in the second quarter because industrywide domestic overcapacity drove down fares and led to more empty seats on aircraft.
However, United executives confidently said the situation will start to improve in mid-August, when airlines begin reducing their rate of capacity growth. Moreover, United expects the capacity adjustment to be long-lasting, in large part due to the financial challenges faced by discount U.S. carriers.
"This is a very different environment, and the capacity hopefully will be slow to come back," chief commercial officer Andrew Nocella said during the carrier's Q2 earnings call on Thursday.
For the quarter, United reported net income of $1.32 billion, up from $1.08 billion during the same period last year.
Last year's figure, however, included a one-time expense of $813 million for retroactive pay raises when United reached new labor contracts with pilots and machinists. Adjusting for those payments, the carrier's pre-tax profit margin for the second quarter declined to 12.1% from 15.3% a year ago.
United's total revenue per seat-mile flown was down 2.4%, while its percentage of seats filled, or load factor, was down 2.2 percentage points.
Nocella said that industrywide domestic capacity for the second quarter was up 6.6% compared to last year, a figure that will hold steady through mid-August. But based upon announced schedules, an inflection point will come around that time, leading to a year-over-year capacity increase of just 2.5% to 3% in the second half of August and September.
United, which flew 8.3% more capacity in the second quarter than it did a year ago, will be included in that relative draw-down. The carrier also said Thursday that it will reduce capacity by approximately 3 percentage points in the fourth quarter compared to its previous plan.
Much of the industry's draw-down will come from low-cost airlines. While United, Delta and Alaska have already reported healthy margins and profits for the second quarter, worse results are expected for discount carriers that focus heavily on domestic service. Spirit, most notably, said Tuesday that it expects an operating loss of around 13% for the quarter.
Meanwhile, Frontier, JetBlue and Southwest have all struggled in comparison to United and Delta, which have benefitted from their long-haul networks and premium cabins.
According to Nocella, United estimates that the five least profitable domestic-centric U.S. airlines have operating losses of 25% to 35% on the weakest 25% of their networks. He said approximately 10% of current domestic flying is "severely unprofitable capacity."
Because of these stark numbers, the industry appears to be adjusting more quickly to overcapacity than it has in recent memory, according to executives at United and Delta.
Nocella said he expects that once domestic capacity reaches a better balance with demand, the adjustments will stick for a while. Struggling airlines, he said, can't afford to experiment with money-losing flying. And he doesn't believe there are many opportunities for discount carriers to find low-competition, profitable city pairs.
That dynamic, he added, isn't likely to change even if one of the discount carriers goes out of business. Spirit, an airline with dwindling cash and a $1.1 billion debt payment looming in September 2025, is in particularly dire straits.
"I don't think one low-margin airline failing or shrinking dramatically in any way will change the outcome for the others at this point given the magnitude of the losses of the worst flying," Nocella said.