United Initiates Stock Buyback As Its Net Rises On Improved Revenue & Cost Performance

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United Airlines Holdings

United (NYSE:UAL) announced to buyback $1 billion of its stock recently as its second quarter profits soared on moderate top line growth and gains from cost cutbacks. [1] The airline’s higher profits in the second quarter were a significant improvement from its heavy losses in the first quarter. We figure the restructuring of Pacific network and cost cutbacks that United implemented in recent months played a key role in improving its second quarter results. The airline’s second quarter top line rose by over 3% annually to $10.3 billion on higher unit revenue (amount collected from each passenger for a seat per mile of flight), which reflects hikes in United’s passenger fares. [1] Additionally, even though United did not expand its flying capacity in the second quarter, its passenger traffic and unit revenue increased highlighting the growing demand for flights in the domestic market and on many international routes.

We currently have a stock price estimate of $46.86 for United, approximately in line with its current market price. We are in the process of incorporating the carrier’s second quarter results, and shall update our analysis shortly.

See our complete analysis of United here

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United’s Second Quarter Profit Rose On Cost Cuts

United’s second quarter profits rose sharply by nearly 70% annually to $789 million on its top line growth and gains from its cost reduction measures. [1] In recent months, United has taken many initiatives to control its costs. The carrier’s cost reduction initiatives are basically revolving 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. [2] As a result of these measures, United’s non-fuel unit costs (total operating costs excluding fuel expense that an airline incurs to fly an airplane seat for a mile) declined on a year-over-year basis in the second quarter. And, with decline in its non-fuel unit costs, United’s second quarter profits rose sharply.

Looking ahead, in the third quarter, United plans to raise its flying capacity marginally. We figure this will help accelerate the growth in the airline’s top line, as higher flying capacity will likely grow the airline’s passenger traffic. Coupled with the ongoing cost cutbacks, United looks set to continue growing its results in the third quarter.

Stock Buyback Indicates That United Is Confident Of Improving Its Financial Health Further

Additionally, buoyed by its higher second quarter profits, United announced to buyback $1 billion of its stock within the next three years. This represents roughly 6% of United’s current market cap, and in our view, indicates that the airline is confident of improving its results and financial health further in the coming quarters. In announcing this decision to buyback shares, we figure United was propelled by similar announcements over the past year from other airlines including Delta (NYSE:DAL) and Alaska (NYSE:ALK). Nonetheless, the fact that United has been able to initiate stock buyback is a good sign for its shareholders. Looking ahead, we figure as United pays down its debt, it will likely follow Delta, Southwest (NYSE:LUV) and Alaska in initiating dividends as well in the future.

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Notes:
  1. United’s 2014 Q2 earnings form 8-K, July 24 2014, www.unitedcontinentalholdings.com [] [] []
  2. United at Deutsche Bank Industrials Presentation, June 5 2014, www.unitedcontinentalholdings.com []