United Continental profit drops to USD653m but revenues growing faster than GDP


Following a host of airlines reporting profits, except Southwest and American, United Continental posted a USD653 million profit, down 23.4%, in the third quarter, behind analysts expectations. Had it not been for USD120 million in integration expenses, it would have posted net income of USD773 million. It managed to post a 7.7% pre-tax margin, however. Its return on invested capital is between 8-9%.

Chief revenue officer Jim Compton, responding to a question about revenue performance, suggested the industry might be breaking its historical relationship between revenues and the GDP, which would be the first time an airline executive has suggested this. Revenues usually track GDP but not in recent quarters when they were way ahead of the 2.5% increase in GDP.

Critical business demand remains up

“Much of that has to do with capacity discipline and we’ve done a good job on that,” he told analysts. “What we are missing is the low-yield, price-sensitive market but we are doing a good job on revenues and yields. It makes a big difference.”

Executives were adamant they saw no reduction in business demand, agreeing with peers who reported the same across the board despite being mindful of global economic uncertainty. In addition, they expect demand to remain stable but are prepared to take action should demand change. The company also reported strong holiday bookings with third quarter yield increases continuing into the fourth quarter.

October passenger revenue per available seat mile (PRASM) is expected to rise more than 10% year-on-year. Mainline domestic advance booked seat factor is up 3.2 points with mainline international advance booked seat factor down 0.5 points. Mainline Atlantic advance booked seat factor is down 0.6 points while mainline Pacific advance booked seat factor is down 4.4 points. Mainline Latin America advance booked seat factor is up 2.9 points. Regional advance booked seat factor is up 1.4 points.

Conservative approach to 2012

However, demand and the questionable economy did colour capacity plans for 2012, according to CEO Jeff Smisek, who said the sluggish economic growth means capacity in 2012 will be flat year-on-year with 2011, which was flat year-on-year with 2010. Indeed, the carrier remains 8% smaller than it was in 2007. International capacity will be up only slightly on the change of gauge to the Dreamliner in the second half of 2012 when it will replace less efficient B767 and B747s.

For the fourth quarter, mainline capacity will be down 3.5% while consolidated capacity is shaved more than 3%. For the full year it is expected to be down 0.5%. The company estimates its fourth quarter 2011 combined consolidated available seat miles (ASMs) to decline between 4.6% and 5.6% and combined consolidated international ASMs to be down 0.8% to up 0.2% for a combined consolidated system ASMs decrease between 2.6%-3.6% year-on-year. For the full year, combined consolidated system ASMs will be down 0.3%-0.5%, with combined consolidated domestic ASMs down 2.2%-2.5% and combined international ASMs up 2.2%-2.4% versus 2010.

Mr Smisek pointed to the revenue potential of its new Mileage Plus programme for contributing to revenues. He said the new programme better differentiated between elite tiers and “engaged frequent fliers in behavior that benefits United”.

He reported progress with unions and hoped the advent of a new master executive chair for United Air Line Pilots Association branch will move the pilot process forward. He was hopeful of reaching a new agreement with flight attendants and the International Brotherhood of Teamsters and the International Association of Machinists in the next few months as a prelude to creating joint collective bargaining agreements for the new United.

Rising revenues, with targets - except fleet renewal - on track

As with its peers, the company reported a jump in passenger revenues, at 9.2% to USD9 billion as consolidated PRASM rose 10.1% to USD 13.57 cents. Even so, fuel rose at a faster pace, 41.3% excluding hedge impact increasing USD1 billion in the quarter. As the price declined in the quarter, the company was forced to take a USD56 million charge.

It reported progress in its merger integration with Continental and expects the single operating certificate in the fourth quarter and a single passenger service system during 1Q2012. CFO Zane Grey reported the company expects to reach all synergy targets for 2011.

United said that it has delayed its narrowbody order but realises neither of the solutions chosen by United or Continental provide what it needs, although they did give them time to integrate before making a decision. It is still not ready for that as it is an issue now being studied for the mainline. Mr Smisek noted that it is focusing on the fuel efficiency of new aircraft, maintenance costs as well as how passenger experience. However, he added any order would not be for growth but fleet replacement.

Revenue and capacity

Total revenue surpassed Delta’s USD9.86 billion at USD10.17 billion, up 8.7% compared to the combined United-Continental results in 3Q2010. All statistics are measured against combining United and Continental in the year-ago period. The company bested analysts estimates of USD10.11 billion in revenues, according to FactSet.

Consolidated passenger revenue for the quarter jumped 9.2% to USD9 billion while consolidated revenue passenger miles (RPMs) declined 1.5% to 56.8 billion and available seat miles (ASMs) declined 0.8% to 66.6 billion. This resulted in a consolidated load factor of USD85.3%, down 0.6 points. Yield for the third quarter jumped 10.9% year-on-year to USD 15.91 cents as total RASM rose 9.5% to USD 15.26 cents.

Latin America led United Continental regions with a 27.1% increase in passenger revenue to USD675 million, as PRASM rose 21% and yields jumped 21.9% increase on a 5.1% increase in capacity. Latin America was followed by a very robust domestic performance which included an 8.4% increase in passenger revenue to USD3.4 billion, a 10.8% increase in PRASM, a 10.1% increase in yield on 2.3% fewer ASMs.

Mr Compton reported while Europe was weaker, emerging trans-Atlantic markets were up including the Middle East at 15% and India at 14%. Interestingly, Delta reported it was scaling back Middle East capacity on the unrest in the region. For United, however, fares are up 12% and 16%, for the Middle East and India, respectively.

Corporate revenue and yield each rose 13%, which he said was excellent considering the low GDP growth. Mr Compton echoed others in reporting softness in the financial sector but pharmaceuticals and consulting remained strong.

Its Pacific results showed an 8.2% increase in revenue to USD1.3 billion while PRASM was up 6.5% and a 9.9% increase in yield on a 1.6% increase in ASMs. Japan PRASM is up 9.8% in the third quarter.

Trailing the regions was the Atlantic, which continues to suffer from overcapacity. United Continental dropped its capacity in the region by 1.6% during the quarter, following its peers. Passenger revenue increased 5.6% to USD1.7 billion, as PRASM increased 7.3% and yield jumped 9.4%.

International revenue rose 9.9% to USD3.7 billion as PRASM increased 9.2% and yield increased 11.6% on a 0.6% drop in capacity.

Mainline revenue rose 9.1% to USD7.2 billion as PRASM rose 10.1% to USD 12.54 cents and yield jumped 10.8% to USD 14.56 cents on a 0.9% decline in capacity to 57.9 billion.

United Express revenue was also robust, rising 9.5% to USD1.7 billion as PRASM rose 9.6% to USD 20.56 cents and yield rose 10.5% to USD 25.52 cents on a 1% drop in capacity to 8.6 billion. Load factor also dropped, 0.6 points to 80.2%. Regional capacity purchase expenses dropped 0.8% to USD619 million.

The company also reported a 4.9% increase in other and cargo revenue in the quarter, rising USD53 million year on year. Other revenue rose 7.7% to USD844 million while cargo declined 2.4% to USD283 million for a total of USD1.1 billion for the two metrics.

Executives attributed the slowing, 5.5% ancillary revenue growth, to focusing IT work on integration. However, it did introduce a fee for the second bag on international routes which should bring in increased revenues owing to its position having the broadest global network. Up-selling its economy plus seats led to a 17% increase in revenues from the product.


Fourth quarter consolidated cost per available seat mile (CASM) ex fuel and special items is expected to be up a modest USD1.5-2.5%, slightly higher than guidance. For the full year, the company expects CASM, excluding fuel, profit sharing, certain accounting charges and merger-related expenses to be up 2.0%-2.3%. It is expecting fuel in the fourth quarter to be USD3.15 and for the year it will be USD3.05.

While revenue rose 9.2%, expenses jumped USD962 million or 11.6% in the quarter to USD9.236 billion on an additional USD1 billion in fuel cost, excluding hedges. Operating expenses, ex fuel, profit sharing and special items, increased USD57 million, 1% year-on-year.

CASM ex special items and fuel rose 11.7% to USD 13.68 cents while mainline CASM ex special items increased 11.3% in the quarter. When including special items, consolidated CASM rose 12.5% to USD 13.86 cents.

United ended the quarter with the most robust cash position at USD8.4 billion in unrestricted cash, cash equivalents and short-term investments. It generated USD385 million of operating cash flow.

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