United Airlines CEO Scott Kirby believes United has built a “competitive moat” around its rivals. The imagery of a ring of water around the carrier may not be precise, but Kirby is quite right to point out that structural changes in the airline industry have set United up for success in the years ahead.
United Airlines And Its Competitive Moat
Every quarter, I listen to United’s earnings call and laugh at the language analysts use when questioning United’s C-Suite: words like “color,” “headwind,” and “lumpy.” It’s such investor-class verbiage.
Another term that has come up multiple times in the last year is “competitive moat,” which is essentially a sustainable advantage that a business has over its competitors. That can include unique features of a company’s product or service that make it difficult for competitors to compete.
Kirby loves this phrase and believes that his carrier has, along with Delta Air Lines, built up this moat around its competitors.
Last year, in the 2024 Q1 Earnings call, he elaborated on what he meant:
The industry has structurally changed and United and at least one other have essentially a moat around our business now that never used to be before. The moat, by the way, to be clear, is a moat that is based on having a better proposition for customers. We have a better product, we have a better network, we have a better loyalty program and they choose to fly us. And what makes it unique? Other airlines can have a piece of that, but what makes a couple of airlines unique is we have great products, we have great service, we have a global network, it’s hard to replicate. We can get you to Singapore, two destinations in New Zealand, three in Australia, Cape Town, Marrakesh, Paris and hundreds more.
That was almost a year ago and the point was that United’s varied product offerings, extensive route network, and popular loyalty program made it very difficult to practically replicate.
In a sense, a moat or wall is the wrong term, isn’t it? Yes, United has insulation from its peers, but it’s not the moat itself that provides protection, as it did to castles and villages in centuries past. Instead, the defense is time and money. Manpower too.
Even if the money problem was overcome, there is no rapid route to progress. Let’s say a group of investors got together and wanted to invest in a new carrier. Buying aricraft? Get in line…it’s going to take years (see e.g., Riyadh Air). Delivery delays are adversely impacting the long-term planning of every carrier eying growth. People? Good luck finding the sort of people critical to run an organization on any sort of abbreviated time horizon. Slots? Everything may be possible for a price, but the sort of price investors are willing to stomach considering the historic low margins of the industry.
This week, Kirby returned to the theme of a moat, saying:
Cost convergence…combined with effective revenue diversity at United for the first time ever, and industry-leading product and service causing customers to choose United are just irreversible structural changes that have created a competitive moat for United…[T]here are two additional tailwinds this time around. The international environment…is going to be far stronger for longer because of the structural supply constraints that are going to last at least for the rest of this decade. Wide body supply, both airframes and engines, is even more challenged than narrow bodies.
And second — domestically, the seeds of the 2012 to 2014 era’s demise were being sown at the time with 15% to 20% growth from the ULCC. It’s very hard to see that happening again. Importantly, all of this means that the industry is evolving into an equilibrium where each airline driven by economic necessity will be primarily focused on flying where they have a competitive advantage.
In short, Kirby believes the delay in delivering aircraft makes it impossible for others to catch up to United. He also thinks that investors have wised up and are not going to pour money into ultra-low-cost carriers when the business model fundamentally does not work due to high fixed costs (we’ll explore this issue a bit more tomorrow).
I would never use the word “irreversible” and I also think that most folks, investors included (and perhaps investors especially) have short-term memories. Therefore, I expect that even if some budget carriers we know today do not survive, new ones will rise from the ashes. Kirby is right to point out the structural difficulties in running a budget carrier in the USA, but those do not strike me as irreversible.
CONCLUSION
Moats provide defense against others, but they are not impenetrable. Kirby is quite right that United has built up a competitive moat around it and that will buoy it for years to come, absent a sharp economic downturn, war, or another pandemic. But to borrow another metaphor, Kirby would be wise not to forget that the bridge must be lowered to attract people into the castle…if folks don’t want to fly United or spend on a United co-branded credit card, the moat will become moot. It’s time to build more bridges before rejoicing over moats.