Lower Fuel Prices, Cost Cuts Could Lift United’s Profit

United (NYSE:UAL) will announce its fourth quarter and full year 2014 results on Thursday, January 22. The network carrier has posted impressive profits in the last two quarters, benefiting from the cost reduction measures that it has taken in the past months. In the fourth quarter, we figure United will post marginally higher passenger revenue driven by modest capacity expansion. However, the carrier’s overall revenue could remain flat due to lower ancillary revenue, which consists of items such as extra baggage fees and ticket change fees.

United’s fourth quarter profit could rise on lower jet fuel prices and gains from cost cutbacks. United’s full year 2014 results should also be impressive, as it has already nearly doubled its profit (excluding special items) to $1.5 billion in the first three quarters of 2014. We currently have a price estimate of $55 for United, around 15% below its current market price.

See our complete analysis of United here

Modest Capacity Expansion Will Lift Passenger Revenue

In the fourth quarter, United expanded its flying capacity at a modest rate of 0.9% year-on-year. ^[1] Faced with aggressive expansion from low-cost carriers such as Southwest and JetBlue, and smaller carriers like Alaska, United shrank its capacity in the domestic market in the fourth quarter. So, based on flying capacity, United continues to lose share in the domestic market.

To compensate for this loss in the domestic market, United is expanding in the international market. The modest increase in the carrier’s overall capacity in the fourth quarter was driven by expansion on international routes. We figure that the increase in United’s overall capacity will likely lift its fourth quarter passenger traffic and passenger revenue. However, the carrier also forecasts a decline in its ancillary revenue. So, United’s fourth quarter top line could remain flat with growth from passenger revenue being offset by decline in ancillary revenue.

Lower Jet Fuel Prices, Cost-Side Measures Could Lift Profits

Despite a flattish top line, United’s fourth quarter profit could rise on lower jet fuel prices, which fell during the quarter due to the sharp decline in global crude oil prices. The carrier’s profit will also benefit from cost cutbacks. In early 2014, United took many steps to improve its cost performance. The carrier contained its salary costs by raising employee productivity through the use of technology. The carrier also saved on maintenance costs by implementing lean practices, and it saved on distribution costs by attracting greater bookings through united.com. Through these measures, United expects to save around $250-300 million in 2014. ^[2]

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1. United Continental Holdings Investor Update 01/09/15, January 9 2015, www.unitedcontinentalholdings.com [↩]
2. United at Deutsche Bank Industrials Presentation, June 5 2014, www.unitedcontinentalholdings.com [↩]