United (NYSE:UAL) will announce its third quarter earnings Thursday, October 24. The carrier will likely post moderate growth in its passenger revenues on higher unit revenues (amount collected from passengers per seat for a mile of flight), driven by fare hikes and supported by a stable demand environment for flights. In its guidance, United expects its third quarter passenger unit revenues to rise by 2.5% – 3.5% annually. In an investor update filed in late September, the carrier expects its third quarter cargo and ancillary revenues at between $1.28 billion and $1.33 billion, up from $1.14 billion in the same period last year.   In all, the higher year-over-year passenger, cargo and ancillary revenues mean that United will post strong growth in its top line in the third quarter.
Sharp Rise In Non-Fuel Operating Costs Will Impact Profits
United’s top line growth will also boost its third quarter profits. However, the carrier’s sharply rising non-fuel operating costs will weigh on its profits. United forecasts its third quarter non-fuel operating costs to rise by 6.4 – 7.4% annually.  This is in sharp contrast to the moderate rates of growth seen in Delta’s non-fuel operating costs. We figure that Delta is able to control the rise in its non-fuel operating costs due to its structural cost controlling measures, which include fleet restructuring, maintenance redesign, staffing efficiency and distribution channel changes. Delta introduced these measures last year after it concluded its integration with Northwest, which it acquired in 2008. United on the other hand has its hands full with the integration of Continental, which it acquired in 2010 , two years after the Delta-Northwest combination. It is conceivable that like Delta, United will be able to control the rise in its non-fuel operating costs in a few years from now. However, it is likely that third quarter profits will get impacted from its sharply rising non-fuel operating costs.
Alaska’s Earnings Preview
Separately, Alaska (NASDAQ:ALK) will also announce its third quarter earnings Thursday, October 24. The carrier will likely post strong growth in its top line on higher passenger traffic driven by capacity expansion and supported by a stable demand environment for flights. However, Alaska’s gains from higher passenger traffic will be offset in part from a marginal decline in its unit revenues, which provide a measure of passenger fares. We figure that Alaska’s ability to price its fares in some of its markets has fallen in the recent months due to expansion of low cost carriers such as JetBlue (NASDAQ:JBLU) in those markets, including the Pacific Northwest and the state of Alaska.
We currently have a stock price estimate of $68.25 for Alaska Air Group, marginally above its current market price.
Higher Passenger Traffic Will Drive Top Line Growth
In the second quarter, Alaska continued to raise its flying capacity by expanding to new transcontinental and mid-continental markets, and increasing its frequency on certain existing routes. Overall, in the second quarter, the carrier raised its flying capacity by 7.2% annually. This drove growth in its passenger traffic which increased by 6.8% annually. 
However, Alaska’s gains from higher passenger traffic will be partially offset by a decline in its unit revenues. The carrier’s third quarter unit revenues fell primarily due to expansion of low cost carriers in its core markets of the Pacific Northwest and the state of Alaska.
In May, JetBlue started non-stop flights on the crucial Seattle-Anchorage route at fares as low as $119.  This route in 2012 was the leading non-stop route for Alaska in terms of revenue generation.  JetBlue’s low priced fares on this crucial Alaska route limited the latter’s pricing power for this route and contributed to its overall unit revenues falling by 1% annually in the third quarter. Notes:
- United Continental Holdings Investor Update 9/26/13, October 18 2013, www.unitedcontinentalholdings.com [↩] [↩]
- UAL Corporation Announces Third Quarter 2012 Results, October 25 2013, www.unitedcontinentalholdings.com [↩]
- Alaska’s September traffic results form 8-K, October 10 2013, www.alaskaworld.com [↩] [↩]
- JetBlue’s Anchorage to Seattle Route is Now On Sale for as Low as $119, December 17 2012, www.jetblue.com [↩]
- Alaska’s 2012 10-K, February 14 2013, www.alaskaworld.com [↩]