United (NYSE:UAL) will announce its first quarter earnings Thursday, April 24. The airline is coming off a good 2013 in which it posted steady improvement in its results. The carrier ended the year with revenues of $38.3 billion, up 3% annually, and profits of $571 million, up from a loss of $723 million in 2012.  Towards the end of 2013, United also announced that it will raise its flying capacity by around 1-2% per year over the next few years, after steadily reducing its flying capacity since 2008. 
However, in the first quarter, instead of expanding capacity, United’s flying capacity fell marginally due to winter storms in the northeast U.S., which includes a large portion of its service network. In its most recent investor update filed earlier this month, United said it had to cancel approximately 35,000 flights due to severe weather conditions that were experienced in early January. The carrier estimated that these flight cancellations lowered its flying capacity by around 2% year-over-year in the first quarter.  Thus, if it were not for the inclement weather conditions that hit North America early this year, then United’s first quarter flying capacity would have risen.
The carrier’s first quarter passenger traffic also declined marginally due to winter storms. Weather-related cancellations also lowered its first quarter unit revenue – amount collected from each passenger for a seat per mile of flight. Lower flying capacity, lower passenger traffic and lower unit revenue effectively mean that United will post lower passenger revenues in the first quarter. Additionally, with weakness in the global cargo market persisting, United forecast a marginal decline in its first quarter cargo revenues. We figure growth from ancillary revenues which include ticket change and extra baggage fee will partially offset this decline in United’s passenger and cargo revenues. All in all, United’s top line will likely decline in the first quarter.
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On the bright side, savings from cost reduction measures will aid United’s first quarter profits. We currently have a stock price estimate of $46.57 for United, approximately in line with its current market price.
Cost Cuts Will Tame Growth In United’s Non-Fuel Costs
In the second half of last year, United initiated many cost reduction measures to temper the high growth in its non-fuel costs. The carrier set itself a target of reducing its annual non-fuel costs by $1 billion by 2017.  It outlined a detailed plan of achieving this cost reduction through various heads which include employee salaries, maintenance, sourcing and distribution.
Accordingly, United is lifting its employee productivity in part by asking customers to tag their own checked bags and to swipe their own passes before boarding planes. It is also implementing lean practices to save on maintenance costs, and taking measures to increase bookings through united.com to save on distribution costs. In all, through savings realized from these measures, United anticipates the growth in its non-fuel unit costs (non-fuel costs per seat for a mile of flights) to come down to around 3-4% per year in the first quarter, from over 8% year-over-year growth in 2013.   We figure this significant decline in United’s non-fuel cost growth will aid its first quarter profits.Notes:
- United’s 2013 10-K filing, February 20 2014, www.unitedcontinentalholdings.com [↩] [↩]
- United’s 2013 investor day presentation form 8-K, November 19 2013, www.unitedcontinentalholdings.com [↩] [↩]
- United Continental Holdings Investor Update 4/8/14, April 8 2014, www.unitedcontinentalholdings.com [↩] [↩]