United Continental Witnesses Significant Improvement In Q4’16, Outlook For Q1’17 Bleak

+25.63%
Upside
47.88
Market
60.15
Trefis
UAL: United Airlines Holdings logo
UAL
United Airlines Holdings

United Continental (NYSE:UAL) announced its fourth quarter and full year 2016 results on the 17th of January 2017, beating the consensus for both revenues and earnings. As expected, the improvement in unit revenues and restriction in capacity in the fourth quarter helped support the top line, but higher operating expenses and tax expenditure continued to weigh down the earnings.

1801171

As stated before, United’s revenues showcased marginal improvement on the back of a lower than expected decline in unit revenues, and the 8.2% y-o-y growth in revenues from cargo. The main reason behind the lower than expected decline in unit revenues was the robust performance by the carrier domestically due to stronger close-in bookings and yields in November and December, and in Latin America. However, the Atlantic and the Pacific regions continued to be under pressure. Furthermore, the company saw a modest decline in occupancy rate at 50 bps, indicating that the company is on the right path as far as capacity management is concerned.

Relevant Articles
  1. Spurred By Stellar Earnings, Can United Airlines Holdings Stock Extend Its Run?
  2. United Airlines Holdings Stock Looks Set For A Come Back
  3. Down 13% Last Week, Can United Airlines Holdings Stock Bounce Back?
  4. Is United Airlines Stock On The Move?
  5. Company Of The Day: United Airlines
  6. Will United Airlines Stock Rise After Recent Correction?

180117

In terms of costs excluding fuel and profit sharing, the company expended approximately 4% more in the fourth quarter as opposed to the same period year ago. The higher costs are attributable to the recently ratified labor contracts at United (+5.9%), and the expenditure on aircraft maintenance and repairs (+12.3%). As a result, the company’s operating margins suffered a slight decline at -90 bps, to 11.1% in the quarter. Having said that, United’s pre-tax margins were hit extremely hard due to the multifold increase in taxes over the comparable period. In Q4’15 , the company had booked a consequential tax benefit due to the release of its deferred tax asset valuation allowance, resulting in a low tax expense of $82 million. However,  in Q4’16, the company normalized its tax expenditure and had to incur an additional $180 million in taxes, relating to losses on fuel hedging.

Apart from this, United’s free cash flow in Q4’16 was negative at $420 million. This is a result of higher adjusted capital expenditure, and lower cash flow from operations due to the significant amount paid out in taxes. As explained before, the company accrued tax benefits in Q4’15, but now that it has begun paying out taxes,  tax expenses have increased. However, the full year free cash flow was almost $2.2 billion, down 11% y-o-y.

1801172

Going forward, the company expects to continue restricting its capacity at 1%-2% in Q1’17 and FY 2017, in order to support PRASM and propel revenues upwards. Moreover, despite the first quarter being a tough one for United, the company expects its unit revenues to be in the -1% to +1% range. However, the costs are expected to grow at a roughly 5% rate due to the affect of new labor contracts and higher oil prices. Consequently, the pretax margins delivered by the company are expected to be approximately 0.5%-2.5%. As United implements the comprehensive growth plan laid out by its CEO Oscar Munoz in 2017, we can expect additional benefit to accrue to its earnings.

1801173

Have more questions about United Continental (NYSE:UAL)? See the links below:

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

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research