United Continental Is Restructuring Its Pacific Network To Improve Its Revenues

by Trefis Team
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United Continental Holdings
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In the recently concluded March quarter, United‘s (NYSE:UAL) loss widened to $609 million, from $417 million in the year ago period, primarily due to unsatisfactory revenue performance. [1] Though severe winter weather in the northeast and mid-continental U.S. also weighed on United’s first quarter results, the carrier’s losses grew due its inability to grow its top line despite solid demand for air travel. The carrier cancelled approximately 35,000 flights in the first quarter due to severe winter weather. [2] According to United’s own estimates, these cancellations lowered its first quarter profits by around $200 million. So, even after excluding this impact from weather, United had a loss of around $400 million on its hand. Special one-time charges constituted around $120 million of this loss, so the remaining was attributable to the carrier’s operations. [1] We figure substandard revenue performance was the primary factor behind its first quarter operating loss.

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. 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. During the first quarter earnings presentation, United’s vice-chairman and chief revenue officer Jim Compton also said that the carrier’s first quarter revenue performance was below par. So, what are the steps that United is taking to improve its revenue performance? Here, we look at the key measures that United is taking to improve its revenues in the coming months.

We currently have a stock price estimate of $46.86 for United, around 5% ahead of its current market price.

See our complete analysis of United here

United Is Enhancing Its Pacific Network To Help Grow Its Revenues

United is taking many actions to improve its revenues in the near-term. The carrier’s actions are focused around improving the value of its flight network and optimizing its revenue management practices. To improve the value of its network, United is restructuring its Pacific international operations. The carrier is eliminating a few trans-Pacific flights that do not have expected occupancy levels. And, it is also down-gauging or flying smaller airplanes on a few other trans-Pacific routes that have seen demand fall. For instance, the carrier has down-gauged its Sydney and Melbourne service from San Francisco and Los Angeles. And, it is also moving Seattle-Tokyo service to second daily Houston-Tokyo service. United is also reducing its intra-Asia service on many routes including Tokyo-Taipei, Tokyo-Bangkok, Tokyo-Hong Kong and Tokyo-Seoul. Instead, it is increasing connectivity with All Nippon Airways (ANA) with which it has a joint venture covering certain trans-Pacific routes. The excess capacity freed from these flight eliminations and down-gauging is being diverted to new routes that are seeing an increase in demand. United is starting non-stop service to Taipei and Chengdu, China from San Francisco. It is also deploying the largest Boeing airplane, the 747, on Chicago to Tokyo/Shanghai route. Through these measures, United anticipates that it revenue performance from the trans-Pacific air travel market will improve in the coming months.

Apart from restructuring its Pacific network, United is also changing schedules at Denver and Houston airports. The carrier is also removing its hub from the Cleveland airport due to continued losses from that market. United plans to ultimately reduce its average daily departures from Cleveland by 60%. [3] At the same time, the carrier has also made phased changes to its demand forecast methodology and restructured its premium cabin fares on domestic and Latin international routes to improve overall revenues.

We figure these measures will likely improve United’s overall passenger traffic and revenues. This was evident from the carrier’s traffic results for the month of April in which its overall passenger traffic rose by 0.6% annually, after contracting by 0.3% annually in the first quarter. [4] [5] However, the shift of Easter holiday traffic to April this year from March last year would have also worked to raise United’s April passenger traffic. Nonetheless, we figure these actions around improving revenue performance will work to improve United’s results in the second and remaining quarters of 2014.

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Notes:
  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 []
  3. United’s 2013 10-K, February 2014, www.unitedcontinentalholdings.com []
  4. United Reports April 2014 Operational Performance, May 2014, www.unitedcontinentalholdings.com []
  5. United Reports March 2014 Operational Performance, April 2014, www.unitedcontinentalholdings.com []
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