(UAL) United Continental Holdings Sees Slow Revenue Growth in Second Quarter

The largest U.S. airline United Continental Holdings Inc. (UAL) announced that it expects lower-than-expected revenue growth in the second quarter of 2011 due to tough year-over-year comparisons.

Following the announcement, the shares of United Continental tumbled 11.1% and closed the trading day with an 8.55% drop in the share price.

In June, United Continental’s passenger revenue per seat mile (PRASM) grew only 3–4%, much lower than the 14–15% growth in May. The company expects the current quarter’s PRASM (unit revenue) to grow 8.3–9.3% annually, down from the previous expectation of double-digit growth. In the recently concluded first quarter, the company’s PRASM climbed 9.9% following an 11.5% expansion in the fourth quarter.

For the second quarter, United Continental expects capacity growth of 1% year over year, which is toward the low end of its previous guidance of 0.8–1.8%. The company has increased its international flights by 4.3% but decreased its domestic flights by 1.4%.

The company has suffered in the past from rising fuel prices. Though we remain concerned about escalating fuel prices, United Continental has so long been able to pass on higher fuel costs to its customers in the form of fare hikes. United Continental is also well prepared to combat rising fuel costs by reducing flight frequencies, indefinitely postponing flight starts as well as scraping unprofitable routes and less fuel-efficient aircraft from its fleet.

In addition, United Continental hedges its fuel position that restricts its losses and provides increased profitability. For the remainder of fiscal 2011, the company has hedged 28% to 44% of its expected consolidated fuel consumption using a combination of calls, swaps and collars.

United Continental’s expected second quarter revenue growth is lower than projections of its rival Delta Air Lines Inc. (DAL) but higher than American Airlines, a wholly owned subsidiary of AMR Corporation (AMR). Delta Air Lines expects double-digit unit revenue growth in the second quarter while American Airlines expects a 4.5–5.5% increase.

We are currently maintaining our long-term Neutral rating on United Continental. The stock retains the Zacks #3 (Hold) Rank.

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