What a PR nightmare for United.

What could have been resolved by $1,600 is now going to cost United quite a bit more. Potentially up to $2.5 billion, based on an analysis I did which will be explained in detail below.

If you don’t know by now, a Chinese passenger was forcibly dragged off of an overbooked United flight. I won’t go too much into the story, just do a Google search and get some background.

I’m more interested in how this could impact United’s revenue. I’ll be honest, the $2.5 billion I used in the headline was an absolute extreme, and was just to grab people’s attention. This number is how much United could lose if they lost all their China business. I think the actual damage might be closer to the $500 million range, though I think there is still a good chance it could be higher.

Methodology for Analysis

Before I get started, here is the Excel I did my analysis on. You can use this to play with the assumptions yourself.

I used 3 public resources to do my analysis. United’s own website (not going to link to them for obvious reasons), their 2016 Annual Report, and Google Flights (which by the way is amazing to price check with if you are planning on travelling).

1. Found all the flights United has to China

Each day, United has 26 nonstop flights to and from China, and 8 flights that are only offered on certain days each week. From the US, the flights fly out of Newark, San Francisco, Chicago, Washington DC, Los Angeles, and Guam. The China destinations include Beijing, Shanghai, Chengdu, Hangzhou, Xi’an, and Hong Kong.

Flights to and from Chengdu, Hangzhou, Xi’an, and Guam are the ones only offered a few times per week (See Column C in the Excel)

2. Mapped each flight with its respective plane model

When searching for each flight on United’s website, they list out the plane model. (See Exhibit 1 below)

I used their annual report to see how many passengers each plane model could hold.

Page 21 of United’s 2016 Annual Report

3. Mapped the number of First / Business / Economy + and Economy seats available for each plane model

This was an extremely manual process where I counted the number of seats in each seating class (Also see Exhibit 1). This is important as the pricing for each class of seats will be different.

Exhibit 1

4. Found a range of ticket prices for each class on each flight

I used Google Flights to do this analysis. If I didn’t use that, I probably would have given up because looking up ticket prices is a pain in the ass.

Google Flights is pretty awesome

With this it was pretty easy to sort through and find the highest and lowest prices to build my price range.

I looked at flight dates that were within 3 months of the day I did the analysis. Generally, I saw that if you book tickets really far in advance (6 months or more), it may not always be the lowest price. It varied by flight. Also, for a few first and business class ticket prices, they were egregiously higher than other prices, which I suspected was because they were full or almost full. I decided not to use these since they only appeared on less than 3 days per flight.

Baseline Assumptions and Adjustments

Economy + Adjustment

You can’t book Economy + tickets directly so there were no prices. You have to select Economy tickets, and then an option came out where you could upgrade (See the top right portion of Exhibit 1). I saw that the upgrade costs somewhere between $260 and $360. I ended up using the lower range because I had no idea what “Economy + Enhanced” was, and thought it sounded like a gimmick. I added this onto all the Economy ticket prices to come up with the Economy + ticket prices.

Holiday Adjustment

We all know it sucks to travel during the holidays because ticket prices are more expensive. Well it’s even more so for these long international flights. However, I only included long holidays, because most people aren’t going to fly 13 hours to China during Thanksgiving for a 5 day trip. It’s not even enough time to get over your jetlag.

So I added a price factor of 1.5 for Christmas, New Years, Chinese New Years, and Chinese Independence Day. I assumed that the higher prices would be for around 1 week for each holiday.

I also included a price factor for summer vacation. When I was searching Google Flights, I noticed that July and August generally had higher ticket prices. This is because a lot of Chinese kids are on vacation during that time, so they will be traveling back and forth a lot. I added a 1.25 factor to account for this.

Baseline Prices

I used a simple average between the low and high price for each seat class in my calculation to find a daily total revenue for each flight.

Baseline Conclusion

Now I am ready to see how much United makes from their China flights.

$4.5 Billion!

Considering United made $36.6 Billion in total revenues in 2016, this would be equal to around 12% of their revenues. The number seemed a bit high.

Further Adjustments

I made quite a few adjustments, as you can see on the second tab in the Excel. The adjustments were as follows:

% Full

This was a factor I used to account for how full each flight was. Obviously not every flight is going to be 100% full every day for the whole year. So I bumped this down to 90% for most of the flights. Since Chengdu, Hangzhou, and Xi’an are all smaller cities than Beijing, Shanghai, and Hong Kong, I bumped flights to those cities down to 80%.

United’s average for 2016 was around 80%, and most of the flights I’ve flown on United to China were completely full. I wouldn’t be surprised if the % full for each flight to Shanghai and Beijing was even higher than 90%.

Economy + Factor

For Premiere Gold members of United’s rewards program, they received a free upgrade to Economy + when they book Economy tickets (see popup box in Exhibit 1).

To account for this effect on price, I made an assumption about the number of people that are Premiere Gold. I have no idea what this number is, so I just assumed that 40% were business people that didn’t want to pay for business class seats or people that flew a lot.

First Class Factor

I also made an assumption about first class tickets. I assumed that these tickets were not always sold out on every flight. I assumed that because these tickets are the highest margin, United has the most leeway in giving discounts. So even though it seems like there are people sitting in first class, I assume some or most of them were upgraded from business.

Other Adjustments

I added something called a “high price adjustment factor.” I assumed most people would always try to get the best deal. By originally using a simple average to calculate the average price per seat class, the resulting prices would be skewed to the high side. This adjustment factor essentially brought the average price down.

Another overarching assumption I made was that if flights were not full, it was more likely that people bought economy tickets than business or first class.

Adjustment Conclusion

After all of these tweaks to the model, I ended up with China contributing about $2.5 billion in revenue!

This is what United would lose if they stopped all of their flights to and from China.

I found an article that cited Factset, a data analysis company, estimating United’s China revenue to be around $2.2 billion for 2016.

Looks like my new adjusted number is much more reasonable now.

Scenario Analysis

Finally, I took a look to see how this disaster could potentially impact United’s revenues.

The underlying assumption here is that demand would be negatively impacted. However, we don’t know by how much, so I came up with a few scenarios.

Scenario 1: If we assume that demand is impacted so much that flights cannot fly every day, and instead only flies 6 days a week instead of 7, then the impact is ~$400 million.

Scenario 2: If demand is low, United might cut prices on their first and business class tickets. I used a price cut of 50% on these tickets. I did this because I expected margins on economy seats to already be very slim, thus there is a lot more room to cut prices in the luxury seats. The impact is ~$500 million

Scenario 3: If we assume that demand drops by 5% for all China flights, then there is already a $550 million impact. If demand drops by 10%, then the impact reaches $800 million. I made this change to the % Full assumption by dropping it 5 and 10% respectively.

Other Thoughts

This analysis only looks at United flights between the US and China. It doesn’t take into account the effect from Chinese-Americans living in the US and who use United to fly to other destinations. It also doesn’t take into account all non-Chinese customers who have been disgusted with United and will now refuse to fly with them.

For example, if we look at the Chinese population in the US, Chinese-Americans made up around 1.2% of all Americans in 2010. Let’s just round down to 1% for simplicity’s sake. If we assume that Chinese-American’s contributions to United’s revenue is similar to their proportion of the American population, and if we assume all Chinese-Americans will boycott United, then we can do a simple calculation using 1% multiplied by $34 billion (United’s 2016 total revenue excluding China). This is another ~$340 million that could be potentially impacted.

Final Conclusion

Whew, if you made it this far, congrats to you.

I think based on my 3 different scenarios, it seems very plausible that United could lose around $500 million per year in revenues from this fiasco, if not more.

Chinese social media (Weibo and Wechat) has been spreading this story like crazy, so there’s bound to be quite a bit of backlash from the Chinese community. If even a small portion of Chinese consumers boycott United, it could have pretty serious financial ramifications for them.

I know for sure I won’t ever be flying with United again.

United Could Potentially Lose $2.5 Billion from their Passenger-Dragging Fiasco
Tagged on:     

2 thoughts on “United Could Potentially Lose $2.5 Billion from their Passenger-Dragging Fiasco

  • April 19, 2017 at 7:50 am

    I think the global Chinese population is overreacting to the fact that he’s Asian, is he even really Chinese? I read reports that indicated he was Vietnamese, not that it makes United’s actions any more excusable.

    The one part of your analysis that you probably also need to consider is in a hypothetical Chinese boycott scenario, is there even enough capacity from the other airlines to step up and take on this load? Especially to less popular routes like Chengdu and Hangzhou. I suspect people will speak badly of United and hate them, but the actual impact is going to far less than the outrage.

    Finally, I think we can all agree that United’s service has sucked for years. Hopefully this is a wake up call to all airlines around the world.

    • April 19, 2017 at 9:43 am

      He is Vietnamese, but I think Chinese people relate because they thought this discrimination was directed towards Asians. Also, since Vietnam is directly south of China, a lot of Vietnamese people have ancestry from China. Based on his last name, he may even have been a first or second generation immigrant from China.

      I agree with your second point. United tickets are generally pretty cheap. And as long as the price goes down for a plane ticket, there will likely be someone who buys it. But I think there is still a portion of the Chinese population that is not price sensitive and who will certainly boycott United. There are plenty of alternative options available.

      And yes, United service has sucked for years.

Comments are closed.