United (NYSE:UAL) will announce its fourth quarter earnings on Thursday, January 24. The airline posted a loss of $103 million in the first three quarters of 2012 as competition from low cost carriers and declining capacity impacted its passenger traffic.  IT and labor issues related to integration of United and Continental also impacted its performance during this period.
In the fourth quarter, United continued to lower its capacity to achieve a higher load factor (percentage of occupied seats in a flight). However, the lower capacity negatively impacted its passenger traffic which will weigh on its Q4 earnings. In all, United will face another tough quarterly earnings in our opinion.
We currently have a stock price estimate of $21.31 for United, approximately 15% below its current market price.
Decline in capacity and passenger traffic
United’s fourth quarter flying capacity benefited from several flight operations started in the third quarter. These include service from Newark to Istanbul and Columbia, S.C.; San Francisco to Raleigh-Durham, N.C.; and Denver to Shreveport, La. The carrier also started operations between Chicago and Monterrey, Mexico, and Washington and El Salvador in December. However, these new services were unable to offset the decline in capacity on other routes.
The carrier continued to lower its capacity on domestic U.S. routes due to stiff competition from low-cost carriers. It also lowered its capacity on Atlantic international routes to Europe due to falling demand resulting from the sovereign debt crisis in Europe. Overall, United’s flying capacity declined around 5% in the fourth quarter on a year-over-year basis. This decline in capacity impacted its passenger traffic, which declined around 3% y-o-y in the fourth quarter.    Lower passenger traffic will likely weigh on the carrier’s revenues and earnings.
Costs and issues related to United-Continental integration
Integration costs related to the merger of United and Continental will also impact Q4 earnings. In the nine months ended September 30, 2012, the carrier incurred $331 million in integration-related costs. We anticipate these costs to continue to impact margins in the fourth quarter. 
Additionally, apart from integration costs, United’s merger with Continental is also impacting its operational performance. In March 2012, the two carriers moved to a common IT platform resulting in a common booking website. However, the system malfunctioned three times leading to flight delays and several cancellations in each instance. Consequently, the on-time performance of the carrier suffered. United recorded on-time arrival rates of approximately 80%, 76% and 72% in Q1, Q2 and Q3, respectively.    In comparison, Delta’s (NYSE:DAL) on-time arrival rates for Q1, Q2 and Q3 were considerably higher at 87%, 88% and 85%, respectively.  In Q4, though the on-time performance for United improved, it was still below its year-ago levels. Lower on-time performance hurts credibility and impacts growth. In effect, these near-term integration issues will impact the United’s Q4 earnings. However, in the long term, the merger should bring significant benefits to the carrier.Notes:
- United Announces Third-Quarter 2012 Profit, October 25 2012, www.unitedcontinentalholdings [↩]
- United reports December 2012 operational performance, January 8 2012, www.unitedcontinentalholdings.com [↩]
- United reports November 2012 operational performance, December 10 2012, www.unitedcontinentalholdings.com [↩]
- United reports October 2012 operational performance, November 7 2012, www.unitedcontinentalholdings.com [↩]
- 2012 Q3 10-Q, October 25 2012, www.unitedcontinentalholdings.com [↩]
- United Announces First-Quarter 2012 Results, April 26 2012, www.unitedcontinentalholdings.com [↩]
- United Announces Second-Quarter 2012 Results, July 26 2012, www.unitedcontinentalholdings.com [↩]
- United Announces Third-Quarter 2012 Results, October 25 2012, www.unitedcontinentalholdings.com [↩]
- Monthly traffic reports, www.delta.com [↩]