Weather Impact And Substandard Revenue Performance Sink United’s Earnings

United (NYSE:UAL) posted a loss of $609 million in the first quarter, down from a loss of $417 million it posted in the same period last year, due to the negative impact from weather-related flight disruptions and unsatisfactory revenue performance. ^[1] During the months of January and February, United cancelled approximately 35,000 flights due to severe winter weather in the northeast and mid-continental U.S.. ^[2] The carrier estimates that this lowered its profits by around $200 million. However, even after allowing for this impact, the carrier still had a substantial loss of around $400 million in the first quarter. Special one-time charges constituted around $120 million of this loss, so the remaining is attributable to the carrier’s operations. ^[1] We figure United’s substandard revenue performance was the primary factor behind its first quarter operating losses.

United’s revenues fell by 0.3% annually to $8.7 billion in the first quarter even as first quarter revenues of many other carriers including Delta (NYSE:DAL) and Southwest (NYSE:LUV) rose on support from the solid demand for air travel. ^[1] United on its part failed to capitalize on this healthy demand environment in the first quarter. The carrier’s performance was especially unsatisfactory on international routes where its passenger revenues as well as unit revenues – amount collected from passengers for a seat per mile of flight – contracted on a year-over-year basis in the first quarter. During the earnings presentation, United’s CEO Jeff Smisek also said that the carrier’s first quarter results were below par and that the company was taking steps to improve it.

See our complete analysis of United here. We are in the process of incorporating the first quarter results and shall update our analysis shortly.

Decline In Topline Among The Key Factors Behind United’s First Quarter Loss

Apart from the negative impact from weather, the increase in United’s loss is glaring as the carrier’s fuel costs declined in the first quarter due to crude oil prices remaining stable. The carrier’s fuel costs, which constitute nearly a third of its total operating expenses, fell by 4.4% or $133 million annually in the first quarter. Its total operating expenses also rose by a modest 0.7% annually to roughly $9 billion in the quarter. ^[1] So given the modest growth in its costs, profits were let down by the revenue decline. In our opinion, in the remaining quarters of 2014, United will have to generate top line growth in order to drive its profits higher. And, we figure this will likely not be very difficult as the demand for air travel especially in the domestic U.S. market and on Latin international routes remains healthy. Additionally, United’s profits in the coming quarters will also benefit from the stable outlook for jet fuel prices.

Second Quarter Outlook

In the second quarter, United plans to raise its flying capacity by 0-1% annually. The carrier also expects its second quarter unit revenue to rise by 1-3% annually on support from the solid demand environment. ^[1] We figure the shift of Easter holiday traffic into April will also help United’s second quarter unit revenue and passenger traffic. This higher flying capacity and higher unit revenue effectively mean that United will post higher passenger revenues in the second quarter. The carrier’s ancillary revenues are also likely to continue to grow, while the decline in its cargo revenues due to weakness in the global cargo markets will likely partially offset the growth from its passenger and ancillary revenues. Thus, in the second quarter, United should post growth in its top line. And, we figure this will likely enable the carrier to improve its profits.

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1. United’s 2014 Q1 earnings form 8-K, April 24 2014, www.unitedcontinentalholdings.com [↩] [↩] [↩] [↩] [↩]
2. United Continental Holdings Investor Update 4/8/14, April 8 2014, www.unitedcontinentalholdings.com [↩]