Amid turbulent economic conditions, United Airlines is coasting on growing premium and business cabin revenue by doubling-down on perks for higher-paying customers.
The airline reported a $2.78 earnings per share for its third quarter on Wednesday, beating the $2.66 analysts estimated, with a net income of $949 million. Revenue came in at $15.23 billion, which is up nearly 3% from last year, but just shy of Wall Street estimates. The company credited brand-loyal and premium customers with driving revenue growth, and projected their fourth quarter to be even stronger.
“United has created enough of a loyalty program, and perks like the fancy seats and the lounges that people keep coming back,” said Morningstar analyst Nicolas Owens. “Even though, in theory, they might be able to get a cheaper seat on a different airline, they want to fly that airline.”
Even as United has found success catering to a wealthier customer base, the airline will have to contend with challenging macroeconomic conditions including tariffs and inflation as it moves into its fourth quarter. The ongoing government shutdown, which has worsened the staffing shortage of air traffic controllers, is also likely to weigh on airlines, although United said it hasn’t seen a significant impact yet.
On Thursday, the day after United reported earnings, the airline’s stock fell around 5%, which analysts attributed to concerns around declining profitability—the company’s operating margin fell to 9.2% compared to 10.5% in the same quarter last year, a sign of rising cost pressures. Wall Street will have to wait and see whether United’s investment in premium perks will cultivate the sort of brand loyalty that will carry them through weakening economic conditions.
United certainly seems to think it will. Loyalty and premium cabin revenue posted strong year-over-year gains in the third quarter, rising 9% and 6% respectively. Revenue from Basic Economy, meanwhile, grew a more modest 4%. Higher-paying customers are already driving growth in the fourth quarter, per a company statement, which also predicted Q4 to deliver the highest total operating revenue for a single quarter in company history.
To tap into their luxury clientele, United is investing into on-board luxuries like seatback screens, extra legroom, seats that convert into fully-flat beds and Starlink internet service, CEO Scott Kirby said in a statement.
United’s bet on higher-paying customers mirrors a sector-wide trend. Air travel demand has softened among customers who fly economy, following a post-pandemic surge.
“The lower-end consumer appears to be having more difficulties,” said Bloomberg Intelligence analyst George Ferguson. “They can’t afford as much as they could afford right after the pandemic. After the pandemic, lots of families saved up money because they couldn’t go anywhere.”
On the other end of the plane, business and first-class travelers appear as willing as ever to splurge on the airlines they know and love. The pattern was even more stark in Delta’s third quarter earnings report last week. The airline’s premium and loyalty revenue both grew 9% compared to the same quarter last year, while main cabin revenue dipped 4%.
“We’re continuing to see that weakness in demand in the back of the airplane,” Ferguson said. “The premium traveler appears to be doing better, right? So, I guess for lack of a better word, the rich, right? The rich always seem to be fine.”