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United Airlines sees unabated recovery despite uptick in variant cases

Highlights

More vaccinations reduce coronavirus impact

European flights increasing from coastal hubs

Q3 jet prices to top Q2 jet prices

Addressing "the most talked about issue among airline investors," United Airlines CEO Scott Kirby said the airline's bookings continue to strengthen weekly despite the global rise in cases of the coronavirus' delta variant.

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While acknowledging that bookings are "backward looking" data, Kirby said during the company's July 21 second-quarter results call that United sees both domestic leisure and business air travel demand recovering faster than hoped.

And when international borders reopen, United expects to see the "same robust hockey stick increase in demand" seen domestically as vaccinations increase across the globe.

"We think that the most likely outcome is that the continued recovery in demand continues largely unabated," Kirby said about the possible effect of the delta variant on air travel.

"That's the most likely and logical outcome because the evidence is overwhelming that someone who is vaccinated is highly protected against severe disease, hospitalization and death," he added.

"With the robust demand trends that we see and our return to profitability, we don't just see the light at the end of the tunnel. We're exiting the tunnel," Kirby said.

Steep hill ahead

United faces a steep hill to climb to reach pre-coronavirus level margins, but the company is poised to benefit more than its competitors from the return of international travel because of its coastal hubs and decision not to retire wide-body jets used for long-distance flights.

"For example, Newark in Q2 was really our worst performing revenue hub. And we expect Newark in Q3 to be one of our best," Andrew Nocella, United's chief commercial officer, said during the call.

Overall, Nocella said that "everything was starting to return to normal" with international capacity in Q3 down 36% versus Q3 2019, due in part to a ramp-up in travel to Europe. In Q2, international capacity was down 53%, compared with Q2 2019.

Commercial flights to Europe from the US did not top 500/day in Q2, according to flight data from RadarBox.com. For the week ended July 17, flights from the US to Europe averaged over 558/day, RadarBox data showed.

"We expect [our] summer Atlantic load factors to be around 70% in 2021, 16 points lower than 2019," Nocella said, adding the summer of 2022 has "the potential to be our best season ever, with pent-up demand and easing border restrictions."

A slower recovery in Asia is a hindrance recovery, where scheduled flights are not seen reaching normal levels in 2023.

Jet prices expected to rise

The slower recovery in jet demand compared with other transportation fuels like gasoline and diesel has kept the price of jet trading at a steeper discount to ULSD, keeping middle distillate cracks "statistically soft, but steady," according to a report from S&P Global Platts Analytics.

So far in the third quarter, US Atlantic Coast jet is holding a 17.2 cent/gal discount to the NYMEX ULSD contract, compared with a 1.82 cent/gal premium held in the third quarter of 2019, Platts price assessment data shows.

United's fuel costs were $1.232 billion in the second quarter of 2021, compared with $240 million in the second quarter of 2020 and $2.385 billion in the second quarter of 2019.

In the third quarter, United expects to pay an average cost of $2.17/gal, compared with $1.97/gal in the second quarter, the company said, as demand continues recover.

"Global mobility and aviation trends continue to look constructive. European aviation has picked up notably," the report said, despite the increase in coronavirus cases in the UK, US, Russia and some Asian countries like Indonesia.

However, the Platts Analytics report noted that use of vaccines has "proven instrumental" in preventing severe cases of coronavirus, despite an uptick in contagion.

"While it is a problem and could temper the pace of normalization in economic growth, it is not seen derailing the broader expected improvement," the report said.