United’s Earnings: Gains From Capacity Reduction And Debt Repayments In Focus

by Trefis Team
-8.91%
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Trefis
UAL
United Continental Holdings
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    Quick Take
  • United slashed its flying capacity during the second quarter in an attempt to improve the percentage of filled seats (which determine profitability) on its flights.
  • The carrier also lowered its total debt and capital lease obligations by around $300 million during April 2012 – March 2013. This will aid its second quarter profit growth through lower interest payments.
  • United’s Q2 profits will also benefit from lower fuel prices during the quarter.

United (NYSE:UAL) will announce its second quarter earnings Thursday, July 25. The carrier will likely post flat top line growth with gains from higher cargo and ancillary revenues like baggage fees offset by lower passenger revenues. The carrier’s passenger revenues were impacted by a decline in flying capacity. However, lower capacity helped the carrier maintain occupancy rates – the extent to which planes are filled – which will boost its profits.

Additionally, we anticipate United’s Q2 profits to benefit from lower fuel prices and debt repayment. The latter will aid profit growth through lower interest payments. We currently have a stock price estimate of $32.60 for United, around 5% below its current market price.

See our complete analysis of United here

Capacity Rationalization Helps Prevent A Decline In Occupancy Rates

United continued to reduce its flying capacity in the second quarter in an attempt to lower the number of empty seats on its flights. The carrier slashed maximum capacity from trans-Atlantic markets to Europe followed by the domestic U.S. markets and the international travel markets to Asia-Pacific. Overall, United lowered its flying capacity by around 2.1% in the second quarter compared to the prior year period. [1]

This decline in the number of seats from the carrier impacted its passenger traffic which will weigh on its top line for the quarter. However, the decline in capacity helped prevent a corresponding decline in occupancy rates – the extent to which flights are filled – which determine profitability.

Lower Fuel Prices and Interest Payments Will Grow Profits

In addition, United’s second quarter profits will benefit from the recent decline in jet fuel spot prices. According to an investor update filed in late June, the carrier estimated to incur an average jet fuel price of $3.04 per gallon in the second quarter. [1] This compares to a jet fuel price of $3.29 per gallon that United incurred in the year ago period. [2] This decline of nearly 8% in United’s jet fuel price will aid its second quarter profits significantly as fuel costs constitute nearly a third of its total operating expenses. Additionally, the benefit from lower per gallon fuel price will be enhanced due to the year-over-year decline in the number of gallons consumed by the carrier driven by capacity reduction.

Separately, United has also steadily paid down its debt, reducing the risk to its business and boosting its profits through lower interest payments. The carrier had acquired significant debt for the acquisition of Continental in 2010, but it reduced its total debt and capital lease obligations to $12.1 billion at the end of the previous quarter, from $12.4 billion at the end of the first quarter of 2012. [3] [4] Lower interest payments accruing from lower debt will aid the company’s profits in the second quarter.

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Notes:
  1. United Continental Holdings Investor Update 6/27/13, June 27 2013, www.unitedcontinentalholdings.com [] []
  2. United’s Q2 2012 10-Q, July 26 2012, www.unitedcontinentalholdings.com []
  3. United’s Q1 2013 10-Q, April 25 2013, www.unitedcontinentalholdings.com []
  4. United’s Q1 2012 10-Q, April 27 2012,www.unitedcontinentalholdings.com []
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