Special Charges And Lower Passenger Traffic Sink United’s Earnings

Lower passenger traffic, superstorm Sandy and integration related costs, severely impacted fourth quarter profits of United (NYSE:UAL). The airline posted a loss of $620 million in the fourth quarter, compared to a loss of $138 million for the same period in the previous year. Revenues of the carrier also declined 2.5% year-over-year to $8.7 billion in the fourth quarter. ^[1]

For the full year 2012, United posted a loss of $723 million as $1.3 billion in special items including integration related costs, labor agreement costs and voluntary severance charges, impacted its earnings. ^[1] The carrier also missed its revenue goals for 2012 as several integration related issues impacted its operational performance.

Looking forward at 2013, with much of United-Continental merger complete, the carrier forecasts better performance in terms of both, operational parameters and earnings.

See our complete analysis of United here

Lower Capacity Impacts Passenger Traffic

In 2012, United started service to several international destinations including Istanbul, Manchester, Dublin, Buenos Aires, Monterrey, San Salvador, Kelowna and Doha. The carrier also started service on 18 domestic U.S. routes. However, these new flights were not able to offset the decline in its capacity on other routes.

In the fourth quarter, United lowered its net capacity on domestic U.S. routes due to stiff competition from low-cost carriers. It also lowered its capacity on Atlantic international routes to Europe due to falling demand, resulting from the sovereign debt crisis in the region. In all, United lowered its capacity by 4.2% y-o-y in Q4. This impacted its passenger traffic, which declined 3.2% y-o-y. Coupled with marginally lower passenger fares, overall passenger revenue for United declined 3.6% y-o-y, to $7.5 billion in the fourth quarter. ^[1]

Superstorm Sandy

Superstorm Sandy which struck northeast United States in last week of October and first week of November, cancelling approximately 15,000 flights also reduced fourth quarter revenues of United by $140 million and profits by $85 million. ^[1]

United-Continental integration and special items

Fourth quarter profits of the carrier were also reduced by United-Continental integration costs of $408 million. ^[1] Integration costs include compensation costs related to systems integration and training, costs to repaint aircraft and other branding activities, costs to write off facilities that are no longer in use, and severance charges associated with headcount reductions. For full year 2012, integration related costs totaled $739 million, up from $517 million in 2011. ^[1]

Apart from exerting direct costs, the integration between United and Continental also reduced revenues and earnings in 2012, by impacting operational performance. The two carriers moved on to a common IT platform in March 2012, resulting in a common booking website. However, the system malfunctioned three times leading to flight delays and several cancellations in each instance. Consequently, the on-time performance of the carrier suffered in 2012. Lower on-time performance hurt its credibility and impacted growth.

Although in Q4, on-time performance of United improved sequentially, but it was still below its previous year levels. Additionally, at the fourth quarter earnings release, United’s vice chairman and chief revenue officer, Jim Compton, said, “We have addressed the integration issues that drove our underperformance [in 2012].” So going forward we could see improved on-time performance from United.

In 2012, profits of the carrier were also impacted by $475 million in labor agreement costs and $125 million in voluntary severance charges. ^[1]

Outlook for 2013

In 2013, the carrier forecasts to continue to reduce its capacity, in an attempt to improve its load factors (percentage of occupied seat in a flight) and thereby its profitability. However, lower capacity will continue to impact growth in its passenger traffic.

On the bright side, United will start taking deliveries of 50 new Boeing 737 Next Generation aircraft in 2013. These will replace older, less-efficient aircraft in its fleet, and thus contribute to fuel and maintenance savings.

We currently have a stock price estimate of $21.31 for United, approximately 15% below its current market price. We are in the process of incorporating fourth quarter earnings, and shall update our analysis shortly.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Fourth quarter and full year 2012 earnings results – Form 8-K, January 24 2013, www.unitedcontinentalholdings.com [↩] [↩] [↩] [↩] [↩] [↩] [↩]