United’s Fleet Restructuring Will Add Growth To Earnings

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United Airlines Holdings

Over the last few years, United (NYSE:UAL) has struggled to keep up its profits with those of its peers, especially Delta (NYSE:DAL). The carrier’s results have lagged due to its substandard revenue and cost performance. However in the second quarter, United posted strong growth in its profits as it improved its cost performance. Here we highlight how fleet restructuring has helped United reduce its cost structure, aiding its profits.

We currently have a stock price estimate of $45.20 for United, around 5% below its current market price.

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United’s Fleet Restructuring is Aiding its Profit Growth

United acquired a large number of less fuel-efficient 50-seater regional jets from its acquisition of Continental in 2010. Certain clauses in Continental’s pilot contracts had prevented United from replacing these 50-seater regional jets with more economical and larger 76-seater regional jets. As a result, United was forced to fly these less economical airplanes in a number of markets, impacting its bottom line over the last few years. However, with a new pilot agreement in place, a few months back, the carrier began replacing the 50-seater regional jets in its fleet with the larger and more economical Embraer 76-seater regional jets. United says this replacement is bringing fuel savings of about 10%. Accordingly, by the end of 2015, the carrier has decided to retire more than 100 50-seater regional jets from its fleet and acquire about 70 Embraer 76-seater regional jets. [1]

Similarly, United is also replacing the older Boeing 757-200s in its fleet with new Boeing 737-900ERs. This replacement is bringing fuel savings of around 15% per replaced airplane, and even after accounting for the higher initial cost of ownership for the new airplanes, each 757-200’s replacement with a 737-900ER is saving more than $2 million annually for United. Consequently, the carrier is planning to acquire about 50 737-900ERs by the end of next year. [1] So, the total cost savings for United from this replacement will be significant, boosting its cost performance.

United is also adding Boeing 787 Dreamliners to its fleet. This new airplane is about the same size as 767-300ERs currently present in United’s fleet. At the same time, the 787 is upto 20% more fuel efficient, compared to the 767-300ER. [1] United is replacing the older 767s in its fleet with the new 787s. Considering that fuel costs constitute more than a third of an airline’s total expenses. These fuel savings resulting from induction of more efficient airplanes will go a long way in shoring up United’s bottom line. Additionally, the 787 Dreamliner has enabled United to start nonstop service on routes which were previously uneconomical for it to serve with a typical wide-body airplane. For instance, routes such as Denver-Tokyo and Los Angeles-Melbourne do not have the traffic necessary for the deployment of a typical wide-body airplane. And, narrow-body airplanes do not have the range to fly these long haul routes nonstop. But, with the addition of 787, which has optimum seating capacity for such markets as well as long range, operation of flights on such routes has been made possible. So, apart from reducing costs through fuel savings, the 787 has allowed United to serve certain markets more profitably.

In all, such fleet restructuring focused on replacing older, less fuel-efficient airplanes with new, more fuel-efficient airplanes will add growth to United’s results in the coming years.

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Notes:
  1. United’s presentation at Deutsche Bank Industrials Presentation, June 4 2014, www.unitedcontinentalholdings.com [] [] []