United Airlines last year topped the $2 billion mark for cargo revenue for the second time ever, following a record 2021, despite a weakening shipping environment that pulled down cargo sales 35% in the fourth quarter.
The Chicago-based airline this week reported stronger than expected net income of $843 million behind $12.4 billion in revenue, 14% more than the 2019 benchmark despite 9% fewer available seats. The revenue total included $472 million for cargo, which exceeded the three-year comparison by 49.4%, but fell 35% on a year-over-year basis.
Cargo revenue’s share of the airline’s total revenue fell to 4.8%, down from a high of 11% in 2020 but still above the historical norm of 3%, as passenger operations recovered to near pre-pandemic levels.
United (NASDAQ: UAL) posted full-year cargo revenue of $2.17 billion, down 7.6% from $2.4 billion the prior year. Against 2019 levels, freight business boomed 84%.
The backslide for United Cargo was inevitable. Last year was the strongest ever for air cargo logistics as demand for airlift from companies desperate to bypass massive ocean shipping delays outstripped tight supply. United set a record with $2.4 billion in cargo revenue, including a quarterly record of $727 million in the last three months. More capacity in the form of passenger aircraft plus reduced cross-border trade weighed down industry shipping volumes by a fifth, with global spot market rates 30% off the high-water mark by the end of 2022.
United also operated few cargo-only flights compared to 2021, when passenger traffic was still weak and it had spare planes and crews for dedicated cargo service. The carrier said it transported more than 1 billion pounds of cargo, including about 121 million pounds of medical supplies and 10,500 pounds of military shipments last year.
Revenue ton miles, which relates to revenue because more money is made the longer distance a shipment is carried, fell 12% and 13.9% versus last year and 2019, respectively. United is still flying a truncated schedule to Asia, where countries have been slower to lower COVID travel restrictions, curtailing business in the lucrative trans-Pacific cargo market.
United’s cargo revenue was actually ahead of last year’s total through the first nine months of the year. The fourth quarter ultimately turned the tables to the downside as shippers, with consumer demand slowing down and high inventory levels, didn’t place as many late-season orders as normal. Shipments limped along during the fall, traditionally the busiest shipping season of the year, instead of picking up.
For the first nine months of 2022, United (NASDAQ: UAL) pulled in $1.7 billion in cargo revenue, $77 million more than during the same period a year ago and nearly double the 2019 take.
Management indicated that cargo volumes will decline further in 2023, in line with industry expectations in the face of a global recession and uncertain export volumes from China because of new COVID outbreaks.
Delta Air Lines (NYSE: DAL), which reported last week, had a smaller drop (18.4%) in fourth-quarter cargo revenue than United. But at $248 million, Delta’s cargo result was still $222 million less than United’s. For the full year, United’s cargo revenue was double that of Delta’s
CEO calls out capacity impediments
Airlines say eisure travel has continued to show healthy demand, while international and business travel are making strong strides toward full recovery.
United executives were bullish about continued strength in travel demand despite economic pressures on consumers. The company issued guidance for a 50% increase in revenue for the first quarter over the same period last year. Stock analysts are buying the thesis that people have a strong desire to keep traveling despite inflation and that airlines will be able to maintain relatively high fares.
United said it expects per-unit costs this year to increase due to new labor contracts. United pilots rejected a tentative contract deal in November that would have provided salary increases of about 15% over 18 months. Higher fuel costs and inflation will also pressure margins unless the company can maintain fare levels. Stock analysts are buying the thesis that people have a strong desire to keep traveling despite inflation and that airlines will be able to maintain relatively high fares.
In a briefing for analysts, CEO Scott Kirby said a number of challenges will prevent airlines from adding capacity necessary to meet travel volumes and anticipated growth. He took competitors to task for treating capacity constraints as one-time events instead of structural impediments, suggesting United would gain customers because more realistic assumptions allow it to be a more reliable, on-time service provider.
Passenger capacity was 7% lower than initial guidance in 2022 and the situation will repeat this year, Kirby warned, for a host of reasons: labor shortages; supply chain challenges that are slowing aircraft manufacturing and the ability of airlines to grow; and non-network carriers and air traffic control with outdated technology that can’t handle extra stress, such as major weather events. The shortage of air traffic controllers is partly due to a young mandatory retirement age and less competitive pay scales. The inefficient air traffic control system is adding to taxi time and airport delays, decreasing aircraft utilization.
In the wake of COVID, airlines, ground handlers and the Federal Aviation Administration need to staff at higher levels to compensate for lower experience levels of new hires, elevated sick rates and new state legislation that makes it easier to call in sick, the United boss said.
United needs 10% more pilots and 5% more aircraft to fly the same amount of available seat miles it did pre-pandemic to overcome the built-in headwinds.
“Like it or not, that’s just the new reality and the new math for all airlines. We may be the only airline that’s actually figured this out,” said Kirby. “We got to acceptance quickly and didn’t spend much time in denial about the structural change.”
Competitors, especially low-cost carriers, that try to operate a full schedule risk major disruptions and higher costs in the long term, he argued.
United was able to limit cancellations during the holidays because it made investments in scheduling and other technology, has a 5% to 10% staffing buffer, is holding 25% more spare aircraft than before the pandemic and running fewer flights.
“All of those obviously cost money, but it’s clearly the right thing to do for our customers … and win their loyalty. These buffers are much less expensive than the cost of avoiding otherwise inevitable operational meltdowns,” Kirby said in a reference to the recent problems at Southwest Airlines.
“Our industry has been changed profoundly by the pandemic. You can’t run your airline like it’s 2019 or you will fail,” he said.
The silver lining of the capacity constraints for airlines is that they can maintain high fares and margins because supply is limited.