Higher Unit Revenue & Cost Controls Will Likely Improve United’s Second Quarter Results

United Continental (NYSE:UAL) will announce its second quarter results Thursday, July 24. The airline is coming off a very tough first quarter in which its losses widened due to weather-related flight disruptions and unsatisfactory revenue performance.

In the second quarter, we figure United’s top line could marginally rise on growth from its unit revenues – amount collected from each passenger for a seat per mile of flight. Unit revenues measure passenger fares, and in our opinion, United’s second quarter unit revenues rose on support from the stable demand environment which enabled the airline to hike its passenger fares. United has also forecast its costs to not rise significantly in the second quarter. We figure the cost reduction measures such as cutting maintenance and distribution costs that the airline has implemented in recent months has enabled it to control its costs. All in all, United looks set to post significantly improved results in the second quarter, compared with the first quarter when it posted a huge loss of $609 million. ^[1]

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

Top Line Growth Crucial For United’s Second Quarter Profit Growth

In the first quarter, United’s loss widened to $609 million, from $417 million in the year ago period, primarily due to its substandard revenue performance. The increase in the carrier’s loss was glaring as its fuel costs fell due to global crude oil prices remaining stable. The total operating costs of the carrier increased by a modest 0.7% annually in the first quarter. ^[1] Given this modest growth in its costs, United’s first quarter profits were let down by a decline in its revenues.

In the second quarter too, United anticipates its unit costs (operating costs incurred to fly an airplane seat for a mile) to remain flat on a year-over-year basis. What this effectively means is that United does not anticipate its total operating costs to rise significantly in the second quarter (given its flying capacity declined marginally during the quarter). So, for United to grow its second quarter profits, it will have to expand its top line. We figure this is possible as United’s unit revenue and passenger traffic increased on a year-over-year basis in the second quarter. In an investor update filed earlier in July, United forecast its unit revenue to rise by approximately 3.5% annually in the second quarter. The carrier also mentioned that its second quarter passenger traffic increased by nearly 1% annually. ^[2] We figure the shift of Easter of holiday traffic to April this year, from March last year, contributed to this growth in United’s second quarter passenger traffic. Nonetheless, what is important is that the higher unit revenue and higher passenger traffic could grow United’s second quarter top line. Additionally, as the airline does not anticipate its second quarter costs to rise significantly, we figure its bottom line will likely improve in the second quarter.

United Has Focused On Raising Employee Productivity & Slashing Maintenance & Distribution Costs

To keep its costs under control, United has taken a lot of initiatives in recent months. The carrier’s cost reduction initiatives basically revolve around four key heads – employee salaries, distribution costs, sourcing costs and maintenance costs. The carrier is containing its salary costs by seeking to raise its employee productivity levels. It is achieving this in part by asking customers to tag their own checked bags and to swipe their own passes before boarding planes. The carrier is saving on maintenance costs by implementing lean practices, and it is saving on distribution costs by attracting greater bookings through united.com. In all, through these measures, United expects to save about $250-300 million in 2014. ^[3] As a result of these measures, the carrier has been able to forecast its unit costs to remain flat on a year-over-year basis in the second quarter.

All in all, United looks set to post a much better second quarter, compared with the first quarter, on higher unit revenue and gains from cost cutbacks.

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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 7/9/14, July 9 2014, www.unitedcontinentalholdings.com [↩]
3. United at Deutsche Bank Industrials Presentation, June 5 2014, www.unitedcontinentalholdings.com [↩]