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New System Dampens United 2Q

Zacks Equity Research

The largest U.S. airline United Continental Holdings Inc. (UAL) reported lackluster performance in the second quarter of 2012. Adjusted earnings of $1.41 per share missed the Zacks Consensus Estimate of $1.69 and decreased 5.4% from the year-ago quarter.

During the last two months of the quarter, fuel price, the major threat to the company’s profitability, dropped to a certain extent, giving some relief to the company’s fuel cost. But at the same time, the shift to a single passenger service system and the new procedures related to Continental merger actions took a toll on the demand for United Continental’s services in the quarter, ensuing in higher costs and revenue loss.

Adjusted earnings in the reported quarter exclude 52 cents per share in special items pertaining to merger-related costs and other one-time charges. Including these charges, earnings dropped 36% year over year to 89 cents.


Total revenue increased 2.4% year over year to $9.9 billion but was below the Zacks Consensus Estimate of $10.0 billion. Airlines traffic, measured in revenue passenger miles, inched up 0.5% year over year. Capacity (or available seat miles) slid 0.6% while load factor (percentage of seats filled with passengers) grew 90 basis points year over year to 84.3%.

On an annualized basis, Passenger and Other revenues increased 2.3% and 11%, respectively, while Cargo revenue decreased 16.1%. Consolidated passenger revenue per available seat miles (PRASM or unit revenue) rose 3% year over year, led by 8.5% spike in regional PRASM and 6.6% hike in PRASM in Pacific.

Operating Expenses

Total operating expenses, excluding special items, rose 3.4% year over year to $9.2 million in the reported quarter.

Consolidated unit cost or cost per available seat mile (CASM), excluding fuel, third-party business expense and special items, crept up 2.8% year over year. CASM, including fuel and special items, rose 4.6% from the year-ago quarter.


At the end of the second quarter, the company had $8.2 billion in unrestricted liquidity including $7.7 billion in cash and short-term investments, and $500 million in undrawn revolving credit facilities.

United Continental generated operating cash flow of approximately $959 million and spent approximately $500 million in the reported quarter.

Our Take

Despite the lingering economic woes, United Continental is expected to benefit from improving air travel demand, Continental merger synergies, global network, rising unit revenue growth, strong competitive position, fleet and network optimization, hedging strategies and a strong liquidity position. These strong attributes would also provide the company a competitive edge over its major rivals — Southwest Airlines Co. (LUV) and Delta Air Lines Inc. (DAL).

Further, falling fuel cost would likely offset costs related to fleet optimization and product initiatives, leading to more profits. The integration of Continental has also helped United to bolster its domestic and international footprints.

Based on falling fuel prices and strong future growth prospects, we recently upgraded our recommendation on United Continental to Outperform. For the short term (1–3 months), the stock holds a Zacks # 2 (Buy) Rank.

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