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United Continental in 4Q net loss

Analysis

Merger costs weighed heavily on United resulting in a net loss of USD325 million for the fourth quarter although full-year results showed USD253 million in net income for a net margin of 4.8 per cent for the year.

Barclays noted that United beat both its estimates and consensus and, although unsurprised by revenue, United's cost picture was better than expected.

Chief Revenue Officer Jim Compton reported that strong PRASM growth in the domestic market brought a 9 per cent increase for the year in the fourth quarter driven by a 9 per cent improvement in yield. He added the company continues to see opportunity for expansion in the African and Middle East markets.

United has seen a dramatic improvement in loads and yield in both the front and back cabins with premium PRASM rising 20 per cent in the Pacific, led by both China and Japan where unit revenues was up nearly 30 per cent and yields were up more than 20 per cent in both countries.

Distribution

"We are seeing continued improvement in corporate demand," he said. "We are seeing increases in corporate travel sales and new accounts because we have the most business-oriented network in the world. Premium cabin unit revenue was up 20 per cent in the fourth quarter across the entire network."

He went right into United's take on the Global Distribution System (GDS) battle echoing US Airways in saying United wants to distribute all of its products through all channels. He emphasized the new technology that is affording customized passenger marketing and expressed frustration that legacy systems can't handle ancillary products yet.

CEO Jeff Smisek indicated over the past 15 years United has managed to reduce distribution costs but would like to see more progress. "Our preference is to offer our products on a broad range of distribution channels whether it is direct or via GDS or whether online or brick and mortar travel agencies," he said. "But we've got to make sure the distribution channels are cost efficient and are appropriately responsive to changes in the products, technology, consumer behaviour and customer preferences. This industry is very innovative and we need folks to keep up with us."

Smisek said the company has taken steps to work with partners to help them adapt. "We are working with Sabre to develop the technology that let us do economy plus upsell," he said. "And we are working with Travelport on something similar. In general, as the business continues to evolve and we continue to innovate and offer more choices to customers, we want to work together with our distributors as good business partners. But we want to make sure the technology is keeping up with the swift pace of innovation and make sure neither we nor our customers are hampered by legacy technologies."

United.com's sales share is surprisingly low at 28 per cent compared to its peers which start at 35 per cent. United, as did US Airways, reported they are not seeing a shift in bookings resulting from American's battles with GDSs or online travel agents. US Airways said although it was possible, it was doubtful.

Well placed for aircraft orders

United indicated that its narrow-body RFP is now on hold as it works through integrating the United and Continental fleets and develops a fleet strategy. However, Mr Smisek did note that the combined company has a solid narrow-body order position thanks to Continental, in addition to a United order with Airbus.

"We have the flexibility as we look at the fleet and as our network folks optimize the demand and revenue sides and as aircraft come off lease the next few years," CFO Zane Rowe added.

Echoing other carriers, United indicated that fuel increases were being successfully met with fare solutions. Fuel surcharges were up 40 per cent year on year across the Atlantic for US point of sale. Smisek indicated it was easier to sell a fuel surcharge because it is transparent and everyone understands that fuel costs are rising.

Results

Consolidated passenger revenue jumped 18.3 per cent for the year to USD23.9 billion while total operating revenue jumped 18.9 per cent to USD34 billion.

The company's consolidated passenger revenue increased 15.8 per cent to USD1 billion in the fourth quarter while consolidated passenger revenue per available seat mile (PRASM) rose 11.5 per cent to 11.90 cents from pro-forma results in 4Q-2009. For the year, passenger revenue rose 18.3 per cent to USD23.9 billion, while PRASM rose 17.9 per cent to 11.81 cents.

United Express revenues jumped 16.3 per cent in the quarter to 1.4 billion and for the year rose 22.5 per cent to USD5.9 billion. Capacity purchase costs nearly doubled from USD388 million in the 2009 quarter to USD688 million and for the year rose from USD1.5 billion to 1.8 billion joining Delta in having a profitable regional program.

Regional affiliate passengers rose 5 per cent to 11.3 billion on a 7.9 per cent jump in RPMs and a 6.8 per cent jump in ASMs for the quarter to 6.3 billion and 8.1 billion, respectively. For the year, RPMs rose 12.5 per cent to 25.9 billion while ASMs jumped 9.7 per cent to 33 billion. Load factor for the year rose two points to 78.5 per cent while PRASM rose 11.7 per cent to 18.08 cents. Yield rose 8.9 per cent to 23.01 cents for the year.

The company ended the year USD8.7 billion in unrestricted cash, cash equivalents and short-term investments.

Total revenues for the fourth quarter jumped 15 per cent to USD8.4 billion. Consolidated revenue passenger miles (RPMs) for the fourth quarter of 2010 increased 4 per cent to 51 billion on a pro forma basis, while capacity increased 3.8 per cent to 62.2 billion year-over-year on a pro forma basis, resulting in a fourth-quarter consolidated load factor of 82 per cent. For the year, RPMs rose 12.5 per cent to 25.9 billion while capacity rose 9.7 per cent to 33 billion.

Consolidated yield for the fourth quarter of 2010 increased 11.3 per cent year-over-year to 14.50 cents on a pro forma basis and for the year rose 15.2 per cent to 14.20 cents. Fourth-quarter 2010 consolidated PRASM increased 11.5 per cent to 11.90 cents compared to the pro forma results for the same period of 2009 and for the year jumped 17.9 per cent to 11.81 cents.

Mainline RPMs in the fourth quarter of 2010 increased 3.5 per cent on a mainline capacity increase of 3.4 per cent year-over-year on a pro forma basis, resulting in a fourth-quarter mainline load factor of 82.7 per cent and for the year, 83.2, up 1.9 points. Mainline yield for the fourth quarter of 2010 increased 12.4 per cent 13.27 cents over the pro forma results for the same period in 2009 and for the year 15.6 per cent to 12.96 cents. Fourth-quarter 2010 mainline PRASM increased 12.5 per cent year-over-year to 10.98 cents on a pro forma basis.

Passenger revenue for the fourth quarter of 2010 and period-to-period comparisons of related pro forma statistics for UAL's mainline and regional operations are as follows:

4Q 2010

Passenger

Revenue

(millions)

Passenger

Revenue

vs. 4Q 2009

PRASM

vs. 4Q 2009

Yield

vs. 4Q 2009

ASM

vs. 4Q 2009

Domestic

$3,005

9.3%

9.4%

8.9%

(0.1%)

Atlantic

1,293

17.0%

8.0%

11.7%

8.3%

Pacific

1,093

33.8%

26.4%

20.8%

5.9%

Latin America

548

26.0%

15.7%

18.2%

8.9%

International

$2,934

24.5%

15.8%

16.0%

7.5%

Mainline

$5,939

16.3%

12.5%

12.4%

3.4%

Regional

1,471

13.9%

6.7%

5.5%

6.8%

Consolidated

$7,410

15.8%

11.5%

11.3%

3.8%

Other revenue in the fourth quarter of 2010 increased 8.0 per cent, or $53 million, year-over-year on a pro forma basis driven by continued growth in ancillary revenue. For the year, other revenue jumped 13.1 per cent to USD2.9 billion.

Higher fuel costs accounted for USD438 million in higher costs for the quarter when consolidated total operating expenses rose 15 per cent to USD8.5 billion. For the year, such expenses rose 12.5 per cent to USD32.1 billion.

Fourth quarter 2010 consolidated and mainline CASM increased 10.9 per cent to 13.68 cents and jumped 12.3 per cent to 13.02 cents year on year on a pro forma basis, respectively. On a pro forma basis, consolidated fuel prices, excluding the impact of hedges, for the fourth quarter of 2010 increased 17.6 per cent compared to the fourth quarter of 2009, while consolidated fuel consumption increased 3.3 per cent year-over-year on a pro forma basis.

In the fourth quarter, consolidated CASM excluding special items and holding fuel rate and profit sharing constant increased 1% and mainline CASM excluding special items and holding fuel rate and profit sharing constant increased 1.1 per cent compared to the pro forma results for the same period of 2009. Fourth quarter 2010 includes USD130 million of expense related to the execution of the trans-Atlantic joint venture for the first nine months of 2010.

Guidance

The company said it was not revising its consolidated full year capacity outlook. Consolidated domestic capacity will be down .5 to 1.5 per cent and reduction of a point from earlier guidance, "underscoring the continued capacity discipline."

Consolidated full year international capacity will be up 4.5 -5.5 per cent as the company takes advantage of network opportunities not only with the strength of the combined network but by taking advantage of the relative macro growth rates around the world.

For the first quarter domestic capacity will be down 1 per cent while international will rise 6 per cent year on year. First quarter consolidated unit costs ex fuel and profit sharing will be up 2-3 per cent while mainline unit costs will be up 2.5-3.5 per cent on inflationary pressures from maintenance and revenue-related costs.

For the full year consolidated unit costs ex fuel and profit sharing will be up 1-2 per cent while mainline will be up 1.5-2.5 per cent year on year.

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