In the recently released FY 2011 annual financial results, most U.S. airlines revealed that they are seeing stable leisure and corporate travel demand trends. Major U.S. legacy carriers including United Continental (NYSE:UAL) and Delta Airline (NYSE:DAL) were able to report a profit in fiscal 2011, amid a challenging year for the U.S. and global economies, marked by high unemployment, slow GDP growth, volatile jet fuel prices and the debt crises in Europe. However, capacity discipline, fare hikes and re-fleeting decisions have contributed to top-line growth and helped mitigate fuel cost pressures.
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Disciplined capacity management and revenue synergies aid top-line growth
The past year, United’s passenger revenues benefited from strong yield performance and prudent capacity deployment to register about 9% growth as compared to the pro forma results for 2010. Yields remained strong across the board as fare hikes by the carrier were successful owing to industry wide capacity discipline and network optimization from the merger. United recorded ~11% y-o-y improvement in yields for domestic as well as international segments.
The carrier largely curtailed capacity on domestic routes in 2011 with nearly 3% y-o-y reduction in available seat miles while international markets saw a 2.4% expansion in capacity. Capacity cuts in domestic markets have translated into better unit revenue performance which grew about 11% y-o-y. The cautious international capacity expansion also contributed to the top-line as international unit revenues jumped ~8% in fiscal year 2011 as compared to 2010. The carrier is guiding to hold capacity flat with a downward bias for 2012 with the first quarter consolidated capacity to be down slightly year-over-year.
Revenue synergies following the merger also contributed to the top-line in 2011, generating approximately $250 million. The carrier expects to generate significantly more revenue synergies in 2012, enabled by the conversion to a single passenger service system. A single passenger service system presents the opportunity to optimize the combined network and would also enable United to harmonize the ancillary product portfolio of the two airlines and roll out new products. The carrier generated over $2 billion in ancillary revenue in 2011.
New fleet, cost synergies mitigating fuel cost impact
Fuel bills increased about 30% y-o-y at United in 2011 due to an unprecedented rise in jet fuel prices during 2011. An increase in maintenance spend also weighed on the bottom-line as the carrier is investing in its maintenance program to improve the condition and reliability of its fleet. United is however mitigating the fuel cost pressures by bringing in more efficient fleet and deriving cost synergies from the merger. Integration efforts yielded $150 million of cost synergies at United in 2011 and expects to achieve an incremental $200 million of cost synergies in 2012.
The carrier expects to induct into service 24 new aircraft this year, comprised on five Boeing 787 Dreamliners and 19 737-900ER aircraft. The Dreamliner is being viewed as a game changer creating new profitable market opportunities for the carrier, especially on long haul routes, with its excellent operating economics.
Our pre earnings Trefis price estimate of $25 is UAL represents a near 5% premium to the market price. We are updating our estimates on United and the other airline companies which should be reflected on our site in the coming days.
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