United Continental Q3’16 Earnings Review: Unit Revenues Remain Under The Pump

+26.22%
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47.66
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UAL: United Airlines Holdings logo
UAL
United Airlines Holdings

United Continental saw another quarter of declining revenues (-4% y-o-y) and earnings (-77% y-o-y) in its latest quarterly report. The primary reason behind the continued weakness in the top-line is the heavy declines in passenger revenues in the Atlantic (9.7%) and Pacific (2.6%) regions, slightly offset by the improvements domestically (-0.9%) and in Latin America (0.3%). In terms of bottom-line, the increase in operating expenses was more than offset by the lower fuel bill, causing operating margins to shrink only slightly by 200 basis points. However, due to the tax benefits accrued in Q3’15, the net income in Q3’16 suffered a hard hit.

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In terms of providing value to the shareholders, the $2.6 billion free cash flow (adjusted for capital expenditure) allowed the company to return approximately $2.4 billion back to its equity owners so far in the year. Despite the amount being much higher on a comparable basis, it failed to buoy earnings per share upwards in Q3’16, due to the release of the income tax valuation allowance of $3.2 billion in the third quarter of 2015.

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The company’s costs, excluding fuel, increased consequently due to higher ground handling costs, food and technology costs associated with enhanced customer experience initiatives, marketing expenses related to the 2016 Summer Olympics, and charges associated with the recently ratified labor agreement with pilots and flight attendants. Going forward, United’s operating expenses are expected to increase, not only due to the increase in fuel expense from the rise in crude oil prices, but also because of the new labor contract coming into effect.

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Although United’s unit revenues for Q3’16 came in line with its guidance range, the downtrend was seen to be persistent, despite minimal capacity growth in the quarter. The fall in PRASM is driven by a strong U.S. dollar, lower surcharges, and reductions in corporate travel. It seems unlikely that the airline will be able to turn around its PRASM numbers in the short term as the foreign currency headwinds continue. As a result, the carrier is expected to curtail the capacity growth in the remainder of the year to 1%-2%, causing full year capacity to increase by less than 1.5%.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for United Continental

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