United Airlines placed an enormous order for 270 new narrow body planes. The new planes will... [+] have some positive upsides for United Airlines but also present risks due to their schedule, capacity and labor costs as well as competitive positioning. Corbis/Icon Sportswire via Getty ImagesUnited Airlines placed the largest aircraft order in its history and the largest ever in the U.S. market. This signals a bullish outlook for travel demand returns. All narrow-body aircraft will be eligible for the order. It includes planes for growth and replacement. Since the announcement of the order, the airline has actively promoted the benefits. Scott Kirby, CEO of United, stated that the main purpose behind the order was to improve customer experience. This is United's most aggressive move to date, following a Boom order for 15 supersonic aircraft just weeks ago.This new United order has many upsides, including the quick refresh of an old fleet. The new plane models, the Boeing 737MAX (and the Airbus A321NEO) are highly efficient and fuel-saving aircrafts that will be more friendly to the environment than United's existing fleet. This order comes with significant risks. It has consequences for the domestic U.S. economy, competition, labor markets and regional airlines.Regional Jets Can Be ReplacedUniteds has released a press release stating that many of these planes will be replacing 50-seat regional jets. This has many interesting implications. This will result in a step function increase per departure in comparison to the RJs. It means that the schedule might need to change in terms frequency or other requirements for each flight. Regional airlines fly the RJs on a cost-plus basis to United. This means that these flights have a lower per-trip price than United-flights. Because regional airlines employ labor that is not covered by Uniteds unions, and generally work at lower wages, this is partly why. A 737 replaces an RJ and it is now United pilots who fly the plane. The regional carrier must either redeploy the plane with United, or find another use for it. Although the plane is larger, it will consume more fuel, although it will likely burn less per seat. It will also cost more to land at most airports and will be more costly to insure.Other Fleet Moves to ExpectScott Kirby, United's CEO, spoke positively about United having more wide-body aircraft than his primary competitors. He saw this as a strength when long-haul business travel returns. It is unclear if he believes that, but both the 737MAX-10 as well as the A321NEOs that were just ordered could replace the carrier's Boeing 767 fleet. A long-range narrow-body aircraft is better than a wide-body, and it allows for more destinations from hubs such as Newark and Houston. United is expected to announce a retirement plan for their older wide-bodies soon.Many of these planes will replace older narrow-bodies, such as the Airbus A319s and older Boeing 737s. United has the opportunity to streamline their fleet and make it more efficient. This means that United will soon decide which aircraft will be retiring from the fleet.Continued Building-Up Of HubsUnited has been steadily increasing the number of its hubs over the past few years in a strategy that has proven successful. They fly to Los Angeles from Denver via their hub. Frontier and Southwest are also available. United must match the lower prices offered by these less efficient carriers along this route. They can add service from Denver into smaller, mid-sized and rural cities like Kalispell (MT), and be less dependent upon the low-priced local traffic from Denver. United uses this concept to build its hubs in Denver, Houston, San Francisco and Chicago.The new fleet order will support the strategy, but it will also increase feed costs by using a United plane instead of a lower-priced regionally flown RJ. United will likely have to modify the bank structure of their hubs (the frequency at which planes arrive for passengers to connect), as they will be flying their frequencies with larger-gauge aircrafts. They could also add more cities, but they would have to be able to accommodate the larger cabins of the new equipment. It will be fascinating to see how this large increase in departures will impact their schedule.The Impact on Unit CostsThis order will help to reduce Uniteds unit costs of production in some ways. It will bring in more efficient aircraft, which burn less fuel and require less maintenance. They are also placing pressure on their labor rates, as they will require more pilots, flight attendants and mechanics at Uniteds rates to support this aircraft. This is a significant increase in cost, compared to the regional feed.The rising cost of labor is a significant issue for the economy. Therefore, Uniteds is at risk by committing to high-cost capital which will increase wages. They are increasing the cost of their hub feed, which is causing them to be highly dependent on business travel. The upgrade adds pressure to an already stressed balance sheet. It creates billions of dollars in new debt. Most airlines focus on balance sheet repair after leveraging up for the pandemic.Curious Response to Competitive DynamicsIn a competitive market, low-cost carriers are growing rapidly and adding nonstop routes that fly over the major carriers hubs. This has led to an increase in seat capacity per flight and a focus on hub connectivity and unit cost pressure. United appears to be determined to beat American and Delta in the big airline game. However, this is making it more difficult for them to compete against the fastest-growing sector of the industry.Some may argue that marginal costs on incremental seats give them the ability to price-competitive where needed. While this may be true in certain cases, it can also mean that a carrier cannot set its price due to competitive capacity. This puts them in a precarious situation for at least part their network. United doesn't dominate their hubs as American and Delta do. This means they are more competitive for customers at all price points. If their service is satisfactory, they seem to be betting that customers will choose United. This bet has not always been successful for other airlines.Customer ExperienceUnited's announcement was remarkable in that they have chosen how to position the new order. Kirby, the CEO of United, has highlighted that the fleet upgrade will improve customer experience. Kirby even highlighted how each seat's individual screens are great for families. This is a risky bet, since most customers have their own screens onboard. If the screen fails, it can ruin the entire flight. United seems to forget that friendly employees and prompt responses to unforeseen situations are the best customer-friendly actions any airline can take. With a new aircraft and a seat back screen, a flight that is delayed or with indifferent service from the airport and crew is not a pleasant experience. Delta's fleet is the oldest among the three major U.S. carriers. They are known for their soft skills, which makes them a top choice in customer service.This is How to Think About This OrderThe new United order is a major win for both the airline and the company. This order increases competition among big carriers and makes a bullish statement about business travel returning to support this increase in capacity. It is risky to choose for certain costs over potential revenues. United is purchasing great equipment at attractive prices. This lowers the risk. Their hubs are located in large cities that can handle all of these new seats. However, they are under increasing pressure to reduce costs and become less dependent on low-cost regional feed. This puts them in an advantageous position where traffic will not only return but also choose them over the competition. American and Delta will notice. However, the U.S.'s lower-cost airlines will likely be more motivated to grow because they know that United is under pressure.
