Last year, United (NYSE:UAL) posted a loss of $723 million due to merger-related issues, which severely impacted its on-time performance.  However in 2013, the carrier has improved its operational reliability drastically with nearly 81% of its flights arriving on-time in the first quarter.  In addition, United continues to invest in products and offerings like flat-bed seats, on board live television and premium club lounges, which are aimed at improving customer service standards and growing ancillary revenues. The carrier has also lowered its debt and interest payments and set a goal of achieving a ROIC (return on invested capital) greater than 10%.
Taken together, these positive developments indicate that United has moved beyond its merger related issues of 2012 and that it will likely post significantly improved results in the coming quarters. We currently have a stock price estimate of $32.60 for United, approximately in-line with its current market price.
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Improved Operational Reliability Will Help Regain Passenger Traffic
Last year, United experienced frequent flight delays and cancellations due to merger-related IT system failures. These delays lowered the carrier’s on-time arrival rate to a low of 63% in July.  Such poor operational performance drove customers including the high-paying corporate passengers away from the carrier. However, now that United has steadily improved its arrival rates to over 80%, passengers are likely to come back to the carrier. This was highlighted in the first quarter results which saw United’s occupancy rates (the extent to which airplanes are filled) rise by three basis points year-over-year to 81.1%.  Though reduced flying capacity also played a part in improving the carrier’s occupancy rates.
Looking ahead, United will likely post better results with improved operational performance.
Enhanced Services And Lower Debt/Interest Payments Will Aid Growth
At the same time, United will benefit from its enhanced service offerings. Earlier this year, the carrier started offering satellite-based WiFi on long haul overseas routes. It also offers live television – DIRECTV – on more than 200 aircraft, economy plus seating which features more legroom, and has launched apps that allow passengers to sign up for priority boarding/check-in/security check with ease. Apart from attracting passengers, these enhanced services will generate additional revenue, growing the carrier’s profits.
Separately, United has also steadily paid down its debt, reducing the risk to its business and boosting its profits through lower interest payments. The carrier acquired significant debt during the acquisition of Continental, but it reduced its total debt and capital lease obligations to $12.1 billion as of March 31, 2013, down from $15.1 billion at the end of 2010.   As a result, its interest payments are expected to decline to $700 million in 2013, from around $1 billion in 2010. Notes:
- Fourth quarter and full year 2012 earnings results – Form 8-K, January 24 2013, www.unitedcontinentalholdings.com [↩]
- United’s first quarter earnings release, Form 8-K, April 13 2013, www.unitedcontinentalholdings.com [↩] [↩] [↩]
- United’s JPMorgan Aviation, Transportation & Defense Presentation, March 4 2013, www.unitedcontinentalholdings.com [↩]
- United’s 2011 10-K, February 22 2012, www.unitedcontinentalholdings.com [↩]
- Barclays High Yield Bond and Syndicated Loan Conference Presentation, May 22 2013, www.unitedcontinentalholdings.com [↩]