(UAL) United Continental Holdings Beats Expectations on High Fares

The largest U.S. airline United Continental Holdings Inc. (UAL) has reported second quarter adjusted earnings of $1.49 per share, outpacing the Zacks Consensus Estimate by 7 cents. Despite higher fuel prices and capacity cuts, earnings were aided by increased fares.

Adjusted earnings exclude $39 million of special items pertaining to merger-related costs and other one-time charges. Including these charges, earnings per share dropped 11.5% year over year to $1.39.

Revenue

Total revenue climbed 9.1% year over year to $9.7 billion in the reported quarter, and was in line with the Zacks Consensus Estimate. On an annualized basis, Passenger, Cargo and Other revenues showed increases of 10.1%, 5% and 0.9%, respectively.

However, the drop in demand for air travel following the March 11 earthquake and tsunami in Japan restricted passenger revenues by about $100 million. United Continental trimmed its Japan capacity by 11.8% during the reported quarter.

Airlines traffic, measured in revenue passenger miles, dropped 1% year over year while capacity or available seat miles upped 1%. Load factor (percentage of seats filled with passengers) declined 100 basis points year over year to 83.4%. Consolidated passenger revenue per available seat miles or unit revenue rose 9% from the year-ago quarter.

Operating Expenses

Total operating expenses, excluding special items, increased 12.2% year over year to $8.85 million in the reported quarter. Steeper expenses were largely due to a 45.2% year-over-year rise in fuel price, excluding the impact of hedges.

Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, crawled up 2.2% year over year. CASM, including fuel and special items, grew 11% from the year-ago quarter.

Liquidity

The company ended the second quarter with cash equivalents including short-term investments of $8.6 billion. United Continental generated operating cash flow of approximately $753 million and spent approximately $178 million.

Our Analysis

Though we remain concerned about escalating fuel prices, United Continental is able to pass on higher costs to its customers in the form of fare hikes. We believe the company will continue to benefit from merger synergies, global network, strong competitive positioning, low costs, fleet optimization and a strong liquidity position.

In addition, United Continental hedges its fuel position that restricts its losses and provides increased profitability. The company has hedged 51% of its expected consolidated fuel consumption for the remainder of the year.

However, high unionization, competitive threats from its peers Delta Air Lines Inc. (DAL) and AMR Corporation (AMR), and integration of Continental Airlines with United might pose major risks to the company’s profitability going forward.

We recently upgraded our long-term recommendation from Neutral to Outperform on the stock. However, for the short term, the stock retains a Zacks #3 (Hold) Rank.

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