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US Big 4 prepare for Boeing delays and higher fuel prices

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US Big 4 prepare for Boeing delays and higher fuel prices
Boeing was a key discussion for the US’ big four airlines at the 2024 JP Morgan Industrials Conference. With the manufacturer’s deliveries continuing to be impacted by quality issues, the airlines are scaling back their aircraft deliveries. Five incidents involving a Boeing aircraft occurred over the past week with the latest being a hydraulic leak on a United Airlines 777-300ER flight taking off from San Francisco on March 12. A tyre had also detached from a United Airlines 777-200 aircraft shortly after take-off. “Deliveries are going to be way behind what they expected,” said United Airlines CEO Scott Kirby. However, he believed that Boeing needs “to go slow to go fast” as the company makes the “larger changes” required. He added: “As much as I would like those deliveries, this is not a 12-month issue. This is a two-decade issue. And I'd rather Boeing do what they need to do”. “Boeing needs to become a better company,” said Southwest Airlines CEO and president Bob Jordan, “and deliveries will follow that.” Southwest had expected 58 deliveries of 737-8 aircraft, which has now been scaled back to 46 amidst delays. Kirby added that United has requested Boeing to focus on building MAX 9s and stop its production of MAX 10s for airlines because certification for the aircraft is still expected to be out of reach for the year. “If and when the MAX 10s get certified, we’ll convert them back to MAX 10s,” said Kirby. “MAX 10 is out for us until it’s certified.” He added that narrowbody deliveries will likely be a mix of Boeing and Airbus to compensate for the delays. He added: “We have time, we have flexibility. Boeing will be able to deliver us a lot of airplanes on the MAX 9. Maybe not in the next 1.5 years – but they will.” American Airlines CEO Robert Isom was confident that the airlines’ exposure to the Boeing delays will be handled. He said: “On the 737 MAX side, as we go through 2026 then go from 20 down to 10, those are MAX 8s. And we really don't have any exposure to the MAX 10 until we get out into 2028 and beyond. And of course, the 787s, this is just a modest delivery stream that will be very well managed”. The big four all noted that fuel prices had risen, impacting their first quarter expenses. Jordan said: “Fuel prices have risen over the recent weeks, both for crude and jet differentials. So, we’re also feeling pressure on first quarter fuel costs.” He added: “Our current hedge will protect us from extreme spikes.” Delta Air Lines CEO Ed Bastian said: “Our fuel prices are up about $0.15 per gallon higher than where we were when we gave guidance.” Isom added that its guidance had changed after fuel costs increased. Bastian also noted that premium revenues “are killing it” and are expected to “gain strength” with the past year totalling close to $20 billion for Delta. He added: “Close to 40% of our total revenues are coming in the premium space. It’s the highest margin that we produced, and it’s the fastest growing part of our cabin.” Kirby added that United is also investing more into its premium business with it “working on a new” business product in order to “refresh it”. American's Isom said: “If there's one thing about the pandemic that it's taught us, people want to travel. They don't like being cooped up and they're going to come back to our products… We know that business travel is not all the way back yet… I think that it bodes well”. JP Morgan analysts Jamie Baker and Mark Streeter said in their takeaway report: “Premium is a core tenet of American’s future, with a planned 20% increase in premium capacity between now and 2026 (a phenomenon shared with Delta and United, though we have yet to calculate their corresponding planned growth).” Airline loyalty programs are showing significant prospects to generate revenue with United’s Kirby adding that the “opportunity for the loyalty program is magnified.” He added: “There are opportunities for lines of business that haven't even existed amongst airlines. We've spent the last year working on those… We haven't publicised them yet, but we're already doing things and generating revenue from one particular line of business that I think is going to grow substantially in the loyalty side.” Baker and Streeter said in their takeaway report: “UAL was the first to collateralise loyalty over the pandemic through debt, and we are expecting the company to be the first (of the US majors) to monetise loyalty on the equity front in some way.” Isom said: “We have a unique opportunity right now to create a real travel ecosystem… we have the opportunity to renegotiate our co-brand credit card deals. We have great relationships with Citi and Barclays, but we can be so much more.” He added that its loyalty program is a two-way benefit. “Life is better” for loyalty members, said Isom, but “it’s better for American Airlines as well” which can be seen through its revenue generation from loyalty programs. Bastian said: “The health of our loyalty program continues to stay strong. Co-brand spend on the Delta American Express credit card is approaching 1% of US GDP, which is a pretty lofty number when you think about that.” Jordan also concurred that Southwest’s loyalty program Rapid Rewards is “doing extremely well.” He added: “If you go back to the fourth quarter, we had record memberships and additions and record loyalty program revenues.” With significant growth and investment in the big four in loyalty programs and business seats for the year ahead, perhaps the yields will leverage against the rising fuel prices.