The stock of United Continental Holdings (NYSE:UAL) has gained about 18% since the start of this month as the sector exhibited strength following expected benefits from American Airlines’ (NYSE:AMR) bankruptcy and some positive macro cues. Traffic declines this November, however, weighed on the sentiment for the stock.
The November operational results released earlier in the month show that United and Continental’s combined consolidated traffic in November 2011 decreased 3.6% y-o-y, on a combined consolidated capacity decrease of 4.0%, with slightly lower load factor as compared to the same period last year. The carrier was however able to grow y-o-y unit revenues and reports that its consolidated and mainline passenger revenue per available seat mile (PRASM) increased an estimated 10.5% to 11.5% and 9.5% to 10.5%, respectively, as compared to November 2010.
Capacity has been largely curtailed on domestic routes with about 7% y-o-y reduction in available seat miles this November versus 0.8% reduction for international markets. (See United Continental Holdings Reports November 2011 Operational Performance for United and Continental, Press Release, Dec 7)
Capacity lowered on domestic routes
A comparison of 2011 year-to-date capacity to the last year data shows a 2.5% expansion in the international markets and about 2.8% reduction in the domestic seat miles. The company is optimizing its network in favor of international markets in order to capitalize on the market opportunities enabled both by the merger and next-generation aircraft technology.
United will take delivery of 5 Boeing 787 Dreamliners next year, with the first coming into service in the second half of 2012. The aircraft is being viewed as a game changer creating new profitable market opportunities for the carrier, especially on long haul routes, with its excellent operating economics. On the other hand, domestic capacity is being reduced with the conversion of 14 Boeing 767 300 aircraft from the domestic configuration to the carrier’s international configuration.
The carrier also announced this month, that United Airlines will launch daily service between its Washington/Dulles hub and Doha, Qatar, via Dubai, effective May 1, 2012, subject to government approval (See United Airlines Announces Daily Service From Washington to Doha, Qatar, Press Release, Dec 8).
In Q3, United Continental registered an impressive 15% y-o-y growth in unit revenues for its Middle East operations, driven by nearly 12% hike in air fares in the region. In its Current Market Outlook, Boeing notes that despite the civil unrest in many Middle eastern economies, the region’s economy is forecast to grow 6 percent in 2011, outpacing the world average.
While air transport markets in the rest of the world shrank during the global economic downturn of 2009, international air travel continued to grow for Middle East carriers, demonstrating the region’s prominence in global air travel. International traffic continued to grow during 2010, rising 17.8 percent for Middle Eastern carriers-far exceeding the world average of 8.2 percent growth. (See Current Market Outlook 2011-2030, Boeing)
We currently have a Trefis price estimate of $26 for UAL, which represents a 22% premium to the market price on the last close.