Fitch: Positive Credit Implications for United via Cost Cutting

NEW YORK—(BUSINESS WIRE)—United Airlines’ (B/Positive) ongoing cost-cutting efforts, including its recent announcement that it will cut capacity at its Cleveland hub, are credit positives according to Fitch Ratings.

United Monday announced its intent to reduce total flights out of its Cleveland hub by 60% as part of its broader effort to cut $2 billion in annual costs by 2017. We believe the changes in Cleveland make strategic sense given that much of the flying out of that hub is done on 50-seat regional jets (RJs). Small RJs have become less attractive from a unit-cost perspective in recent years as fuel prices have remained high, making the changes in Cleveland positive from a cost per available seat mile (CASM) standpoint.

United Airlines stated that its Cleveland hub has been unprofitable for many years. Cutting money-losing routes follows an industry trend of rationalizing capacity to increase return on investment capital, a practice that has played a large role in increasing the stability of U.S. carriers.

United Airlines’ broader cost-cutting efforts include restructuring its regional fleet away from smaller RJs, improving fuel efficiency by taking delivery of new aircraft or retrofitting older aircraft with winglets, and improving employee productivity. Fitch expects United Airlines’ cost-cutting efforts to aid operating margins, which have lagged industry peers in recent years.

United Airlines’ decision to cut capacity is not unexpected, as Cleveland represents the smallest hub in its network. The Cleveland hub is also situated relatively close to both Newark and Chicago, which are major United Airlines hubs.

Other cities have also seen large capacity cuts in recent years. For instance, Memphis and Cincinnati both represent small hubs in large networks that relied heavily on small RJs to serve connecting traffic.

United Airlines expects this move will cut regional departures by more than 70% in Cleveland, mainly represented by routes to smaller cities where connecting traffic in Cleveland was not sufficient to be profitable. Meanwhile, mainline flying to other hubs and major cities will largely be retained, meaning United Airlines will maintain the ability to serve origin and destination traffic in Cleveland.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.