Network Airlines’ Earnings Preview: United & American Will Likely Post Healthy Third Quarter Results

United (NYSE:UAL) and American (NASDAQ:AAL) will announce their third quarter results Thursday, October 23. These large network carriers are coming off a good second quarter in which they reported sharp growth in profit on higher demand for air travel on many domestic and international routes. In the third quarter, we figure both United and American will likely post healthy growth in their top line driven by modest capacity expansion. Both carriers will likely also be able to post healthy profits as cost pressures from fuel prices eased during the quarter. In all, both United and American will likely post good results in the third quarter.

United’s Q3 Earnings Preview

United improved its profit to $789 million in the second quarter of this year, from a loss of $609 million in the first quarter, on better revenue and cost performance. ^[1] We figure in the third quarter, the carrier will likely be able to retain its strong profit performance of the previous quarter.

During the third quarter, United raised its flying capacity just marginally, instead focusing on improving its unit revenue – amount collected from each passenger per seat for a mile of flight. Unit revenue is determined by passenger fares, and in the third quarter, United has forecast its unit revenue to rise by 3.5-4.5% annually. ^[2] We figure this healthy growth in United’s unit revenue indicates that the carrier likely raised its passenger fares on some routes during the past year. Effectively, higher unit revenue and higher flying capacity mean that United will likely report higher passenger revenue in the third quarter.

On the margin front, United has forecast its non-fuel CASM (cost per available seat mile) to rise by only 1% annually in the third quarter. ^[2] Non-fuel CASM is a standard metric used in the airline industry to measure an airline’s cost efficiency. Fuel costs are excluded from this metric so as to better assess how well an airline manages the costs it can control. In our opinion, this low growth in United’s third quarter non-fuel CASM is a result of its past cost cutbacks. Through various cost initiatives spread across distribution, maintenance, and sourcing operations, United targeted to take out $250-300 million from its costs in 2014. ^[3] We figure that gains from these ongoing cost cuts will help translate United’s top line growth into healthy profits in the third quarter.

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

See our complete analysis of United here

American’s Q3 Earnings Preview

Separately, American raised its flying capacity by 1-2% annually in the third quarter. Backed by stable demand for air travel, this increase in seats from American raised its third quarter passenger traffic. Coupled with modest growth in unit revenue, we figure American too will likely post moderate growth in top line in the third quarter.

What will be interesting to see is if American can retain its top spot in quarterly profit among U.S. carriers. Last quarter, American posted profit of $864 million, compared with profits of $801 million and $789 million posted by Delta and United, respectively.  Delta last week reported a core profit of about $1 billion, so it will be interesting to see if American can beat that. The pre-tax margin of 10-12% (excluding special charges) that American has forecast in the third quarter gives the carrier a chance. ^[4] Separately, Delta said in its earnings release October 16 that it is not seeing any impact on its advance booking rates from Ebola. We will watching what United and American have to say about their advance booking rates with regard to any impact from Ebola.

We currently have a stock price estimate of $39.25 for American, around 10% ahead of its current market price.

See our complete analysis of American here

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1. United’s 2014 Q2 earnings form 8-K, July 24 2014, www.unitedcontinentalholdings.com [↩]
2. United Continental Holdings Investor Update 10/8/14, October 8 2014, www.unitedcontinentalholdings.com [↩] [↩]
3. United at Deutsche Bank Industrials Presentation, June 5 2014, www.unitedcontinentalholdings.com [↩]
4. IR Update – October 8, 2014, www.aa.com [↩]