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United Airlines plans $3 billion buyback, but expects unit revenue drop

A worker from United attends to some customers during their check in process at Newark International airport in New Jersey , November 15, 2012. REUTERS/Eduardo Munoz

By Jeffrey Dastin and Sweta Singh

(Reuters) - United Continental Holdings Inc (UAL.N) on Thursday forecast a drop in unit revenue and trimmed plans for capacity growth as the U.S. dollar weighs on demand abroad, but it announced new share buybacks because its profit continues to rise.

The Chicago-based airline said it expects passenger unit revenue to decrease between 5 and 7 percent in the third quarter. Capacity will only grow between 1 and 1.5 percent in 2015 compared to a year earlier, it said, lowering a prior forecast for growth of as much as 2 percent.

Shares rose more than 2 percent in early trade on news of United's plans to buy back $3 billion of its stock. The capacity trim comes as a relief to investors too, who have called on U.S. airlines to limit their growth to match weaker demand.

"Management appears concerned about the decline in unit revenue and is being responsive to weaker demand in some markets," Cowen and Co analyst Helane Becker said in a research note, adding that capacity in Brazil, Japan and Scandinavia took some of the largest cuts.

United's outlook reflects the challenging revenue environment that U.S. airlines continue to face as the strong dollar lowers foreign travelers' spending power in the United States. Rival Delta Air Lines Inc (DAL.N) said last week that it expects passenger unit revenue to decline between 4.5 percent and 6.5 percent in the third quarter.

Despite this, United said it expects a pre-tax profit margin between 13.5 percent and 15.5 percent in the third quarter, excluding special items.

"The $3 billion share repurchase program we announced today demonstrates the confidence we have in our future," Chief Executive Officer Jeff Smisek said in a news release.

Sterne Agee CRT analyst Adam Hackel said the move, three times larger than United's last buyback plan, "signals that the stock is undervalued" and added that United likely will pay out dividends once valuations improve.

United reported a 51 percent rise in second-quarter profit to $1.19 billion. On an adjusted basis, it earned $3.31 per share, in line with analysts' average estimate according to Thomson Reuters I/B/E/S.

Passenger unit revenue fell 3.4 percent domestically and 5.6 percent in total for the second quarter compared to a year earlier. Unit costs, excluding fuel, profit-sharing and special expenses, rose 0.3 percent in the quarter.

(Reporting by Jeffrey Dastin in New York and Sweta Singh in Bengaluru; Editing by Saumyadeb Chakrabarty and Andrea Ricci)