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UAL Slides Due to Weak Q3 PRASM

Zacks Equity Research

The stock price of United Continental Holdings Inc. (UAL) plunged over 9.28% to close at $30.91 on Nasdaq last Friday after the premier passenger carrier reported weaker PRASM (passenger revenue per available seat mile) expectations for the third quarter of 2013.  Weaker-than-expected international revenues can be traced back to the subdued guidance.  

The Chicago-based carrier expects unit revenue growth of around 2.5–3.5% for the third quarter as compared to the previous guidance of 3–5% provided in Jul 2013. The company cited that the reduction is due to lower passenger pay per mile in some of its trans-Atlantic route and addition of capacity in China by competitors.

The new guidance suggests that the PRASM for Sep, 2013, is quite weak as United Airlines has already reported PRASM growth of around 3.5–4.5% in Jul and Aug 2013. Shareholders reacted negatively to the news, bringing about the biggest drop since Oct 3, 2013.

Notably, China is one of the most important markets for the airline giant and the carrier continues to add new routes to increase its exposure in the world’s second largest economy. However, China’s attractiveness as a business destination has drawn many airline companies to increase their presence in the country. This, in turn, has enhanced the seat availability thus affecting the trans-Pacific unit revenue.

United Airline’s earnings performance has also been unimpressive as it suffers a high cost structure as compared to its archrival Delta Airlines Inc. (DAL). United Airlines also lags Delta in fleet restructuring effort. While Delta expects operating margin around 10–11% this year, United guides an operating margin of around 8.5% for the year.

Despite such negatives, the company remains profitable thanks to strong industry fundamentals. The airline industry has mostly outperformed the broader market and UAL is no exception. However, we remain sceptical about the high costs and slower fleet restructure of United Airlines, which could impact the company’s growth story.

United currently carries a Zacks Rank #3 (Hold). However, sector stocks of Republic Airways Holdings Inc. (RJET) and Cathay Pacific Airways Limited (CPCAY) look attractive with a Zacks Rank #2 (Buy).

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