How Can United Airlines Turn Load Factor Into Profitability?

Current Market Position & Load Factor Analysis

United Airlines (UAL) has regained its pre-pandemic market value, with a current market capacity of $28.35 billion. One of the key metrics for assessing an airline's performance is load factor, which indicates the percentage of available seat capacity that is filled with passengers. Airlines can enhance their load factor by optimizing their loyalty programs and enhancing their fleet management. United Airlines 2024 load factor was 83.10%, down 0.8% from 2023.

United Airlines will mark 2025 with its most significant international expansion ever, as it plans to introduce eight new locations and operate 760 weekly international flights. With the industry benchmark for load factors currently sitting at 83.6%, Scott Kirby, CEO of United Airlines, will seek to recover to its 2023 levels ahead of its expansion. United Airlines posted a $985 million profit, driving their stock to recover to pre-pandemic levels. United Airlines will have to increase its load factor to maintain this profitability level and improve it with the new routes.

Two Proposed Strategies for Improvement

1. Loyalty Program Optimization:

United Airlines is currently part of Aeroplan, a group of 50+ airlines that allows customers to collect and use points on flights, hotels, and other purchases. United Airlines is partnered with Chase Bank and American Express to allow customers to gain Aeroplan points on everyday purchases with a credit card.

United Airlines can increase its load factors by optimizing how consumers use their points. One possible route is by creating specialized Aeroplan member exclusive offers for off-season routes, such as Caribbean flights during the spring and summer and European destinations during October and November. These offers would provide significant discounts to Aeroplan members, encouraging existing United Airlines consumers to fly during the off-season.

This loyalty program optimization is a catalyst for growth, fostering loyalty among existing Aeroplan and United Airlines customers and making Aeroplan more attractive to potential consumers. By increasing passengers during off-season flights, United Airlines can surpass the industry load factor benchmark, which is critical to the potential for growth and success.

2. Fleet Optimization:

United Airlines operates over 1000 aircrafts around the world. They are replacing their older planes with more fuel-efficient and eco-friendly planes. One area that can lead to low load factors among airlines is using the wrong aircraft for specific routes. Using a widebody aircraft for an off-season route can lead to a negative gross margin due to high load factors, high fuel expenses, and airport fees.

United Airlines operates 21 different aircraft types, a diversity that places them among the top five most diverse airlines in the world. This variety of choices allows United Airlines to swiftly replace one airplane with another if it anticipates a low load factor for a specific flight. While the initial implementation of such a system may be costly, United Airlines can rest assured that it will profit in the long term, as smaller planes will result in lower fuel costs and higher load factors, ensuring the company's financial stability.

Given that fuel costs are among an airline's greatest expenses, any reduction in these costs, coupled with an increase in load factor, will significantly enhance quarterly and annual reporting. A well-executed fleet optimization could potentially elevate United Airlines above the industry benchmark, and provide optimism for their future.

Strategic Implementation of Loyalty Program Optimization

1. Data Analysis:

   Using load factor trends and historical seat occupancy, United Airlines can identify underperforming off-season routes over the last five years. Once identified, United Airlines can optimize its load factor through their loyalty program, aiming to boost the profitability of these routes significantly.

2. Partnership Alignment:

   United Airlines should continue to collaborate with Chase Bank, American Express, and Aeroplan, and plan to integrate targeted seasonal offers to their consumers. This will bolster relationships with their partners and allow for greater reach to consumers who are using Aeroplan to book with Air Canada or Lufthansa.

3. Dynamic Pricing Models:

   In order to ensure that Aeroplan members feel valued, members should be offered a lower price or higher point redemption values to incentivize off-season travel. The price of travel is often the determining factor in whether or not a person will book a flight. If United Airlines is able to reduce its prices for off-season routes, it can lead to a rise in demand that subsequently increases the load factor rate.

4. Implement a Pilot Program:

   United Airlines should introduce these dynamic pricing models on specific routes (e.g., New York - Barbados during May and June or Chicago - Sao Paulo during October and November). This will allow the airline to trial their pricing model over a six-month period. Through this pilot program, United Airlines will be able to identify whether dynamic pricing and partnership alignment is beneficial to increasing load factor during off-season travel.

5. Full-Scale Rollout:

   Upon completion of the pilot program, if it is determined that there is a correlation between dynamic pricing and partnership alignment and a rise in load factor, United Airlines would benefit from expanding the program to a greater number of routes. This expansion could lead to increased revenue and a stronger market position.

Strategic Implementation of Fleet Optimization:

1. Fleet Analysis:

   United Airlines should use its network planning and data analytics to identify routes with an average load factor of less than 70%. It can use key performance indicators such as cost per available seat mile and seat occupancy by route to determine the actual size of aircraft suitable for the route.

   
   

2. Aircraft Relocation Strategy:

   Once an aircraft is selected, United Airlines will have to undergo a relocation of aircrafts. The first step will be getting the new aircraft to the airport where the flight will depart; United Airlines will then need to relocate the aircraft no longer in service to a route with a demand greater than the supply currently offered.

   
   

3. Technology Integration:

   United Airlines' operations team must work with its IT team to create and implement a real-time load forecasting tool for dynamic aircraft assignments. This will allow United Airlines to track system implementation success and the accuracy of demand predictions on routes.

   
   

4. Trial Tests on Specific Routes:

   United Airlines can use 737 Boeing variations instead of their flagship 787-9 Dreamliners on transpacific flights, which have low load factors. For example, the Los Angeles-Tokyo flights have constantly underperformed on the Dreamliners. A six-month trial can determine whether the cash saved on fuel expenses outweighs the drop in consumer satisfaction with a smaller aircraft.

   
   

5. Full & Continuous Optimization:

   If successful, United Airlines should expand its strategy network-wide. Load factor could increase significantly, and gross-profit margins will increase due to fewer gas and airport fees expenses.

Expected Outcome of Loyalty Program Optimization:

• Increased off-season bookings through Aeroplan point redemption and dynamic pricing.

• Stronger customer loyalty, and an increase in registered/active Aeroplan members.

• Higher load factor, bringing United Airlines closer, or above the industry benchmark.

Expected Outcome of Fleet Optimization:

• Higher Load factors by right-sizing aircraft to demand.

• Lower fuel costs, improving operating margins.

• More efficient use of the fleet, reducing unnecessary expenses and increasing profitability.

Conclusion:

United Airlines continues to ascend, solidifying its position as a leading global airline. Their partnership with Aeroplan has ignited unprecedented growth, matching their fleet expansion. To sustain this growth, United Airlines must urgently address the decline in load factor. By optimizing their loyalty programs, they can increase customer loyalty and expand their consumer base, offering a hopeful outlook for the future. Fleet optimization, a strategic move, can significantly increase gross profit margins. Right-sizing will be expensive at first due to new technology systems needing to be implemented, but in the long run, it will result in fuel efficiency and improvements in their key performance indicators.