The Boeing (NYSE: BA) 747 will soon make its farewell at airline giant United Continental (NYSE: UAL).
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United Airlines has been flying one version or another of Boeing's iconic jumbo jet since 1970. However, United's management recently decided to accelerate the retirement of the carrier's remaining 747s for the second time in less than a year. As a result, the last 747 will depart United's fleet by the end of 2017.
United has been flying 747s since 1970. Image source: Konstantin von WedelstaedtviaWikimedia Commons.
Moving past the 747
Less than two years ago, United Continental planned to keep most of its roughly two dozen Boeing 747s until at least 2020. That made sense insofar as many of United's 747s were delivered in the late 1990s and the typical lifespan of a commercial jet is 25 years.
However, the Boeing 747-400 uses far more fuel than modern aircraft. To make matters worse, United's 747s haven't been very reliable in the past few years.
Furthermore, United's 747s don't have the same kind of amenities as the airline's newer aircraft types. As a result, United Airlines would need to invest heavily to refurbish these planes if it wanted to keep them in its fleet for several more years.
Instead, the company has concluded that it makes more sense to retire its Boeing 747 fleet as soon as possible. Last year, United decided to retire all of its 747s by the end of 2018. It accelerated that timeline this week. In a blog post, company president Scott Kirby announced that United will retire all of its 20 remaining 747s by year-end.
Reining in growth?
Cost efficiency, reliability, and customer experience all played a part in United's recent decision to accelerate the retirement of the 747s. However, this decision also indicates that United is backing away from growth for the time being.
For the past few years, United Airlines has been steadily expanding its international route network. In 2016 alone, it started new routes from its San Francisco hub to Auckland, New Zealand; Hangzhou, China; Singapore; Tel Aviv, Israel; and Xi'an, China. United has used most of its Dreamliner deliveries to start these and other new long-haul routes.
United Airlines has used its Dreamliners to launch numerous new routes. Image source: The Motley Fool.
However, overcapacity is rampant today on routes from the U.S. to Europe and Asia. Indeed, in 2016's third quarter, unit revenue fell 4.1% year over year on United's transpacific routes and plunged a ghastly 10.7% on transatlantic routes. With oil prices starting to rebound, United needs to get unit revenue rising again in these regions before trying to grow further.
United's expansion will likely pause in 2017 with the early retirement of the 747s. The company will add 14 Boeing 777-300ERs to its fleet this year (including two delivered in late 2016) as a direct replacement for its 747s. During 2017, United will also receive the last five 787-9s it has on order. These planes could be substituted for 747s on routes where United wants to cut capacity.
The early retirement of United's Boeing 747s could also have implications for domestic capacity. When United first ordered the 777-300ERs, its plan was to use them to replace smaller 777-200s on certain popular international routes while redeploying the 777-200s for domestic service.
Right now, there aren't many international routes for which it makes sense to add capacity. That's freeing up the 777-300ERs to replace United's departing 747s. This in turn means that some of the 777-200s will remain in the international network for the next year or two, which will hold down domestic capacity growth.
A logical move
When airlines start to face margin pressure from declining unit revenue, the natural reaction is to cut back on capacity. However, that can be an expensive proposition if it entails grounding relatively young airplanes or canceling firm airplane orders.
However, in this case, United has a fleet of aging, fuel-guzzling, difficult-to-maintain 747s just waiting to be retired. Removing them from service should help reduce unit costs, due to the fuel efficiency and reliability of Boeing's 777-300ER and 787-9. Meanwhile, by pausing its growth, United should bolster its 2017 unit revenue performance.
This makes it a no-brainer for United Continental to retire the Boeing 747 ahead of schedule. It will then have the option to return to growth in its international route network in 2018 and beyond.
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