United Beats Market’s Earning Estimate, Slightly Misses The Revenue Forecast

United Continental Holdings (NYSE: UAL) announced its first quarter operating results yesterday, along with low-cost carrier Southwest (NYSE: LUV) and smaller airline Alaska Air (NYSE: ALK). The airline reported total revenue of $8.61 billion ^[1], slightly missing the market estimate of $8.62 billion. The 1% decline in revenue was mostly driven by a significant reduction in other operating revenues during the quarter. Despite this, the Chicago-based airline managed to post earnings of $582 million, or $1.52 per share ((United Announces First Quarter Results, 23rd Aprl 2015, www.unitedcontinentalholdings.com)), beating the analyst estimate by more than $0.08 per share on the back of fuel cost savings of greater than $1 billion in the March quarter.

Our current price estimate for United stands at $69 per share, 7% ahead of its market price.

See our complete analysis for United Continental Holdings here

Low Fuel Costs Boost Earnings

United continued to follow capacity discipline during the quarter, resulting in a negligible increase in its flying capacity and passenger traffic. The airline’s unit revenue increased by 40 basis points as against the airline’s previous guidance of a 1% decline in unit revenue.  In spite of tough competition from low-cost carriers as well as international airlines, United’s yields grew by 0.4% on a year-on-year basis ((United Announces First Quarter Results, 23rd Aprl 2015, www.unitedcontinentalholdings.com)).

While a decline in fuel sales to third party vendors created a drag on the overall revenue, lower crude oil prices significantly lifted the airline’s earnings. United’s aircraft fuel expenses dropped by 36% resulting in cost savings of more than $1 billion compared to the same quarter last year ^[1]. As a result, the operating expenses declined by 13% during the quarter translating into a $1 billion improvement in the airline’s bottom line over a loss suffered in the first quarter of 2014 ^[1].

Speeding Up The Re-fleeting Plans

To counter the rising competition, United, the second largest airline in terms of traffic, has announced its plans to make changes to its current fleet of aircraft. The airline aims to retire more than 130 of its 50-seater planes by the end of the year and continue to retire these planes as and when their leases expire. In return, the airline intends to lease bigger planes to extend the average life of its fleet. The legacy carrier will also extend the life of its Boeing 767 fleet by adding winglets and upgrading its interiors.

In addition, United will replace its order for 10 Boeing 787 jets with a same number of Boeing 777-300ER aircraft, which have larger capacity and longer flight range. The delivery of these new planes is expected in 2016. However, this does not imply that United will rapidly add capacity to its current network, as the airline has slightly cut its capacity guidance for the year. The company now expects to grow its capacity by 1-2% ^[1], down from its previous guidance of 1.5-2.5% increase. This is in line with the recent cutbacks announced by United’s close competitor, Delta.

Outlook for the second quarter

United’s management forecasts a strong growth in its earnings even in the second quarter driven by lower fuel costs and the airline’s cost reduction measures. However, the airline anticipates its top line growth to dip by 4-6% due to the currency fluctuations and lower fuel surcharges. The airline estimates its pre-tax margins (excluding special items) to be between 12-14% in the second quarter of the year ^[1].

For the trailing twelve months, the company’s return on invested capital was 17.1% ^[1]. During the quarter, United returned about $200 million to shareholders as part of its previously announced $1 billion share buyback program ^[1]. The airline will likely use its free cash flows during the year to complete this buyback program and add fuel hedge positions for 2016. The management also hinted at potential dividends or further share buybacks after the completion of the current program.

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1. United Announces First Quarter Results, 23rd Aprl 2015, www.unitedcontinentalholdings.com [↩] [↩] [↩] [↩] [↩] [↩] [↩]