United Plans To Add Capacity After Years Of Scaling Down

by Trefis Team
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UAL
United Continental Holdings
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United Airlines (NYSE:UAL) recently announced in its annual investor day presentation that it will add flying capacity, albeit at a moderate rate, over the coming years after slashing its flying capacity steadily for the past four years. This reversal in the carrier’s capacity stance will likely help it halt the decline in its market share. Additionally, the growth oriented capacity stance indicates that United is largely through with its integration of Continental and ready to focus on competing more vigorously with its competitors.

We currently have a stock price estimate of $36.60 for United around 5% below its current market price.

See our complete analysis of United here

United Pared Capacity To Lift Occupancy Rates And Profits

Since 2008, United reduced its flying capacity by nearly 2% per year. [1] During the financial crisis of 2008-09, the carrier like its peers slashed flying capacity due to lower demand for flights, but even as the demand environment improved with a recovery in the economy, United continued to lower its flying capacity. This conservative capacity stance of the carrier was a well thought out move aimed at lifting its occupancy rates (percentage of seats occupied by passengers in a flight) in flights, as fewer empty seats translate to higher profits. Over the next few years, as United integrated the network of Continental with its own, it continued to lower flying capacity to lift its occupancy rates and profits. Gains from higher occupancy rates eventually enabled the carrier to pare down its losses from around the second quarter of this year.

This discipline in capacity addition was adopted by not only United but also many other carriers including Delta (NYSE:DAL). In our opinion, this conservative capacity stance of many major carriers over the last few years helped the U.S. airline industry return to profitability after nearly a decade of losses, as fewer flights meant lower competition, fuller planes and higher profits.

Shift To A Growth Oriented Capacity Stance Will Likely Arrest Decline In United’s Market Share

This move from United to add capacity by 1-2% per year over the next four years will likely help it counter the ongoing decline in its market share. [1]

Additionally, this move reflects that United is largely through with its integration of Continental, as consolidation of two independent flight networks inevitably leads to a reduction in frequency of flights on some routes and the cancellation of flights on less profitable routes. Recently, Delta also began to add capacity after completing its integration of Northwest.

For the industry, a rise in United’s flying capacity will increase competition. However, United cautioned that it will add capacity at a rate below GDP growth, so that the increase in its flying capacity does not out do growth in demand for flights.

Separately, United also announced in its annual investor day presentation that despite modest growth in its capacity, it expects its maintenance costs to be lower in 2017, compared to 2013, on gains from cost cutting measures which include higher fuel efficiency and employee productivity. (See United Seeks To Improve Results Through Cost Control And Ancillary Growth Initiatives)

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Notes:
  1. United’s 2013 investor day presentation form 8-K, November 19 2013, www.unitedcontinentalholdings.com [] []
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