United Airlines announced lower than expected fourth quarter earnings on Monday, beating Wall Street profit forecasts but warning investors that the ongoing grounding of its fleet of 52 Boeing 737 MAX 9 aircraft will lead to a loss in the first quarter.
Boeing 737 MAX 9 Still Grounded After FAA Discovers New Safety Issue
The airline was forced to cancel more than 3,000 flights in December after the Federal Aviation Administration (FAA) ordered new safety checks on the MAX 9s related to a previously undiscovered risk of failure in the flight deck door plugs. This led United and other carriers to ground the plane type towards the end of 2022.
The FAA said issues were found “in a small number of previously delivered airplanes” and said carriers with affected aircraft must inspect and verify proper installation of the door plugs before further flights. Boeing said they are working closely with airlines and regulators to ensure all planes are confirmed airworthy.
This discovery extends the MAX 9 grounding, which has already lasted over a year since original delays in late 2021 due to separate safety concerns.
United Forecasts $200 Million Loss Due to Grounded MAX 9s
In their fourth quarter and fiscal 2023 earnings report, United said they expect to lose money in the first quarter of 2024, with a pretax loss of around $200 million attributable directly to cancelled flights from the MAX 9 grounding. The airline was previously expecting a “modest” profit.
United CEO Scott Kirby said their 2024 forecast assumes the MAX 9 will return to service by the end of March. But further delays could increase losses to $350-400 million in the quarter. If the grounding extends through June, United said full year earnings could be lowered by up to $500 million from their current guidance.
“The MAX groundings remain United’s biggest challenge operationally and financially,” Kirby told analysts. “Getting them safely returned to service is a top priority.”
United Reports Lower Q4 Profit But Beats Expectations
Excluding special items, United reported adjusted earnings per share of $2.46 in the fourth quarter – significantly higher than analyst consensus forecasts of $2.11 per share. Total operating revenue came in at $13.7 billion, up 10% from a year ago.
The airline benefited from strong winter holiday travel demand, with passenger traffic up 40% despite the loss of MAX 9 flying. Total capacity was down 10.5% year-over-year in Q4, which United said helped maximize yields. Unit costs excluding fuel were up 14.7%, however, due to inflationary pressures and the MAX cancellations.
| Financial Metric | Q4 2023 | Year-Ago Q4 2022 | % Change |
|---|---|---|---|
| EPS (adjusted) | $2.46 | $1.30 | +89% |
| Operating Revenue | $13.66 billion | $12.40 billion | +10% |
| Capacity (Available Seat Miles) | 61.1 billion | 68.5 billion | -10.8% |
| Unit Cost Ex-Fuel | +14.7% | ||
| Net Income | $843 million | $1.12 billion | -25% |
While earnings topped forecasts, United’s Q4 net profit of $843 million was still down 25% from $1.12 billion a year ago. In addition to the MAX issues, the airline continues to face cost pressures from inflation and ongoing labor disputes. Total operating expenses grew by over 15% in the quarter.
Strong 2023 Guidance Despite MAX Headwinds
Alongside the earnings figures, United issued an upbeat full-year 2023 forecast which buoyed investor sentiment. The company expects adjusted pretax income to land between $11-12 billion for 2023. While this accounts for an estimated $1.4 billion hit from the MAX groundings, it still implies earnings growth of 114-131% from 2022.
United said advance bookings for spring and summer travel remain robust, with no signs of demand slowing despite some analysts’ recession warnings. Thanks to capacity discipline, yields remain far above pre-pandemic levels. The airline expects full year passenger unit revenue to increase by up to 30% from 2019.
This confident forward outlook prompted United stock to jump 5% in Tuesday trading. Shares are now up over 10% so far in 2024 after steep declines for much of last year.
“While MAX reliability presents challenges, we are pleased United overcame operational hurdles in 4Q to post forecast-beating profits,” said Cowen & Co analyst Helane Becker. “Management gave an upbeat assessment of 2023 even with conservative MAX return assumptions.”
Labor Disputes Continue to Cloud Outlook
United’s strong forecasts were tempered by CEO Kirby’s warnings around ongoing tensions with employee unions. Pilot and flight attendant contracts remain unresolved after over 3 years of negotiations. Kirby said United is “far apart” from unions on key issues and expressed frustration at the lack of progress.
The airline continues to face staffing challenges, with 20,000 employees calling in sick each week in Q4 2023 – double pre-pandemic levels. United is rebuilding its workforce after mass layoffs and buyouts during COVID lockdowns. But attraction and retention has been hampered by the prolonged failure to agree updated contracts.
Longer Term Impact on United’s Fleet Plans
While United hopes to have its MAX 9 fleet back flying passengers in the coming months, analysts see lingering repercussions from this latest grounding debacle. Relations between airlines and Boeing have been severely strained amid multiple MAX safety failures and delays over 4+ years now.
“Trust has eroded on all sides,” said aviation consultant Mike Boyd. “Carriers will rethink reliance on any single manufacturer.”
United themselves acknowledged that the MAX issues will likely alter their long term fleet strategy. The airline has outstanding orders for over 200 additional MAX jets from Boeing, but suggested future purchases could now tilt more towards rival Airbus. CEO Kirby confirmed United is in talks with Airbus about potentially acquiring A321XLR and A320neo planes as alternatives to more MAX 9s.
This is another blow to Boeing as the manufacturer desperately tries to rebuild its reputation, improve MAX safety, and win back customer faith. But airlines seem increasingly interested in introducing more plane type diversity rather than relying predominantly on one vendor. This could impact Boeing’s order book for years ahead.
Outlook Going Forward
As United hopes for progress on returning the MAX 9s safely to service in early 2024, attention will turn to the actual financial impact if further delays occur. While this quarter is likely to see red ink, the airline expects high passenger demand and yields to continue driving profit growth in 2023-2024.
But labor unrest and potential fleet changes add uncertainty looking further ahead. After a turbulent 4 years since the initial MAX grounding, United knows external shocks can always impact the outlook.
“We are prepared to adapt if conditions change,” said CFO Gerry Laderman.
Industry analysts will watch eagerly over the coming months to see if United can overcome these headwinds and continue delivering on their bold forecasts.
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