Chicago-based United delivered the message Wall Street wanted to hear at its event Tuesday, unveiling a new fare structure designed to both better compete against discounters and extract a premium from less price-sensitive business travelers. The company also said it would limit capacity growth in 2017 to 1% to 2%, and took steps to reduce planned capital spending over the next two years by more than $1 billion.
That capex cut is in large part at the expense of Boeing, with United announcing plans to convert its original order for 65 narrow-body Boeing 737-700 aircraft into four 737s variants to be delivered in 2017 and 61 next-generation 737-MAX aircraft to be delivered sometime in the future. United said it believes it can handle whatever capacity growth needs will present themselves next year without taking on a flood of new aircraft.
United shareholders applauded the plan, sending the company's stock up 5% on Tuesday.
For Boeing, the deferment is yet another obstacle for its commercial operation to navigate through. The manufacturing giant is already planning cuts to production rates for its wide-body 777, which is also transitioning to a newer model, and has seen demand for the passenger version of its 747 jumbo all but disappear.
The 737 program has been a bright spot, with a backlog of more than 4,000 orders. Boeing said earlier this year it intends to raise production of the plane from a current 42 units per month to up to 57 per month by 2019, and the airline said Tuesday that given the order book for the jet it would have little problem placing United's jets with other customers.
But United's decision, which was similar to a move taken by Southwest Airlines earlier this year, is a reminder that even an impressive order book can be fragile. A round of restructurings and consolidation has created a healthy U.S. airline industry even winning plaudits from long-time skeptics like Warren Buffett. The companies seem unlikely to chase growth for growth's sake, and even if they do there are cheaper alternatives available than loading up on new aircraft.
Cheap fuel has allowed airlines to extend the useful life cycle of older, less fuel-efficient aircraft. The increased use of leasing companies to obtain planes means there is a steady stream of used airframes constantly coming on the market for airlines to grab should they want to quickly grow capacity.