United Continental Earnings: What We’re Watching for Thursday
United Continental (NYSE:UAL) will announce its Q2 earnings for 2011 on July 21st. Over the past year, it has benefited from industry consolidation and improved economic conditions, and its earnings should reflect continued improvements from increased fares and ancillary revenues despite higher fuel prices and capacity cuts. UAL was formed after the merger of United Airlines and Continental Airlines in May 2010. With key global air rights in the U.S, Europe, Middle East, Africa, Latin American and the Pacific, United Continental (UAL) has the world’s most comprehensive global route network competing with the likes of Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), American Airlines (NYSE:AMR), and U.S. Airways (NYSE:LCC).
We have a $27 price estimate for United Continental, which is around 30% ahead of the current market price.
What we’re watching
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UAL expects the merger to deliver $1- 1.2 billion in net annual synergies by 2013 including between $800-900 million of incremental annual revenues. The increase in revenue will largely come from revived airline industry conditions, an expanded customer base and improved unit revenue growth as well as network and fleet optimization.
The company hedges its fuel position which protects it from rising fuel prices. It expects its consolidated fuel costs to be close to $3.11 per gallon for this quarter that would have increased to $3.36 per gallon excluding hedging. It is also combating fuel inflation by resorting to higher fares and extra fees apart from reducing flight frequencies and scraping unprofitable routes and fuel-inefficient aircraft from its fleet.
United Continental has gone for more aggressive capacity cuts than its rivals like Delta Airlines and American Airlines. Further, the demand slump due to the massive Japanese earthquake and radiation leaks in March 2011 led United Continental to go for temporary capacity cuts of up to 10-15% in April and May for flights operating between Tokyo and major U.S. cities.
In April and May 2011, United and Continental’s combined consolidated traffic in terms of revenue passenger miles (RPMs) increased 1.1% and 0.3% respectively while its consolidated load factor was down about 1.5 points compared year over year (y/y). While available seat miles (ASMs) increased in April 2011 it declined a little in May y/y. UAL expects its overall second quarter domestic ASMs to be down 1.4% and international ASMs to be up 4.3%, leading to net 1% increase in ASMs compared to Q2 2010.
The most important metric we watch is passenger revenue per available seat mile (PRASM), which increased an estimated 8% to 9% in April 2011 and 14% to 15% in May 2011 y/y. In June 2011, PRASM improvement could have slowed to 3- 4% y/y. As the overall second quarter demand grew slowly but steadily, PRASM for Q2 2011 should have grown between 8.3- 9.3% compared to Q2 2010. Cargo and other revenue should come in between $1- 1.1 billion.