United Continental Holdings: A must-know company overview (Part 13 of 14)
Fuel cost reduction to account for 50% of UAL’s $2 billion cost reduction target
United has the highest cost structure compared to its peers, and while other competitors have seen reductions in their cost per available seat mile (or CASM), United’s cost has increased to 15.1 cents in 2013 from 14.9 cents in 2012. United’s cost reduction plan comprises a target to achieve:
- $1 billion in fuel consumption savings
- $100 million in maintenance savings
- $500 million in productivity savings
- $250 million in sourcing cost savings and optimized distribution channels
The chart below outlines United’s fuel efficiency implementation plan. The plan is to reduce fuel consumption from 16 gallons per 1,000 ASM in 2013 to 14.9 gallon per 1,000 ASM by 2017 through aircraft replacements and the use of winglets and other initiatives to reduce fuel consumption.
United also targets a 10%–15% reduction in maintenance CASM by 2017, to 0.65 cents from 0.76 cents in 2013, by implementing preventive maintenance programs and lean practices and replacing old aircrafts that require higher maintenance. The company also targets a 15%–20% improvement in labor productivity, which is currently 2.91 ASMs/FTE, by aligning staffing with workload, improving process quality, and investing in technology.
All companies in the airline industry, including Delta (DAL), American Airlines (AAL), Southwest (LUV), and JetBlue (JBLU), are investing in improving fuel efficiency, as crude oil prices remain volatile. Delta (DAL) has invested in a refinery to reduce its cost of acquiring jet fuel.
United futures plan to improve operations
United operates in a highly competitive industry. With operations concentrated in the U.S. and strong competitors, there’s a need to improve cost efficiency and profitability. United’s future targets to improve its financial position include:
- Reducing costs by $2 billion by 2017
- Increasing pre-tax earnings by 2x to 4x
- Generating ROIC of at least 10%
- Reducing debt and generating cash to pay shareholders
Browse this series on Market Realist:
- Part 1 - United Continental Holdings: A must-know company overview
- Part 2 - Important details of the United and Continental merger
- Part 3 - United’s strong presence in domestic and international markets
- Airline Industry
- United Continental Holdings