United And Alaska’s Earnings Get A Tailwind From Lower Fuel Prices

by Trefis Team
United Continental Holdings
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    Quick Take
  • In the second quarter, United and Alaska’s profits rose sharply driven by lower fuel prices.
  • United’s profits were also aided by lower Continental integration costs and higher unit revenues  – amount collected from passengers per seat for a mile of flight – driven by a stable demand environment.
  • On the other hand, Alaska’s unit revenues in the second quarter were impacted by entry of low-cost carriers like JetBlue in its core markets of the state of Alaska and the Pacific northwest.
  • However, Alaska offset the impact from its lower unit revenues with higher passenger traffic driven by capacity expansion in the second quarter.

United‘s (NYSE:UAL) second quarter profits jumped $130 million or 38% annually to $469 million, driven by lower jet fuel prices and Continental integration costs. Lower jet fuel spot prices during the second quarter played the largest role in raising the carrier’s profits as jet fuel prices per gallon eased by 8% per year to $3.02 for the carrier. [1] Gains from lower fuel prices were enhanced by fewer gallons of fuel consumed by United as it cut down on flying capacity in support of fuller planes. Overall, the carrier’s fuel costs declined by $340 million annually in the second quarter. United’s second quarter profits also benefited from $92 million in lower year-over-year Continental integration costs. [1]

Additionally, second quarter results of United were also supported by a stable demand environment for flights, reflected from the 1% annual growth in the carrier’s unit revenues – amount collected from passengers per seat for a mile of flight. [1] Though, the second quarter started out with slight demand weakness driven by sequestration, which came in effect from March 1, most carriers including United saw pressure on their unit revenues ease as the quarter progressed. In all, these strong results from United come after challenging past couple of years for the carrier, that saw its losses mount due to integration related costs and issues.

Looking ahead, United will likely build on its strong performance of the second quarter by continuing to focus on improved operational performance especially high on-time arrival rates. We currently have a stock price estimate of $32.60 for United, around 5% below its current market price. We are in the process of incorporating second quarter earnings and shall update our analysis shortly.

See our complete analysis of United here

New Aircraft Orders Aimed At Fleet Modernization

During the quarter, United also placed orders for wide-body aircraft. The carrier increased its Boeing 787 Dreamliner order to 65 aircraft and converted its existing order for 25 Airbus A350-900s to A350-1000s, and added an additional 10 aircraft to the latter order. [1] United will use deliveries against these orders that will start from 2018 to replace old, less fuel efficient wide-body aircraft in its fleet and thus improve its operating cost efficiencies.

The carrier also paid down its debt and capital lease obligations by $540 million during the quarter aiding profits through $19 million in lower interest payments. For full year 2013, United expects to pay $2.3 billion towards its debt and capital lease obligations, which will continue to boost its profits through lower interest payments. [1]

Alaska’s Earnings

Separately, Alaska Air Group‘s (NYSE:ALK) profits also rose to $104 million in the second quarter, from $68 million in the year ago quarter driven by lower fuel prices. The carrier’s fuel costs – which constitute around a third of its total operating expenses – declined by $61 million or 14% annually in the second quarter to lift profits. [2]

Additionally, profit gains from lower fuel prices was supported by top line growth driven by capacity expansion. During the second quarter, Alaska introduced service to twelve new destinations from Anchorage, Portland, San Diego and Seattle. Overall, the carrier raised its flying capacity by nearly 8% per year in the second quarter. This drove growth in its passenger traffic, which also rose by around 8% annually. [2]

However, gains from higher passenger traffic were partially offset by decline in the carrier’s unit revenue, which was impacted largely from the entry of low-cost carriers like JetBlue (NASDAQ:JBLU) in its core markets of the state of Alaska and the Pacific northwest. In May, JetBlue started non-stop flights on the crucial Seattle-Anchorage route at fares as low as $119. [3] This route in 2012 was the leading non-stop route for Alaska in terms of revenue generation. [4] JetBlue’s low priced fare on this crucial Alaska route limited the latter’s pricing power for this route and weighed on its unit revenue.

See our complete analysis of Alaska Air Group here

Looking ahead, Alaska plans to continue to raise its flying capacity to drive growth in its passenger traffic and top line. The carrier is also undertaking steps focused on cost control to offset the impact on its unit revenues from increased low-cost competition. (See How Is Alaska Responding To JetBlue’s Entry In Its Core Markets?)

We currently have a stock estimate of $61.78 for Alaska Air Group, marginally above its current market price. We are in the process of incorporating second quarter results and shall update our analysis shortly.

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  1. United’s Q2 2013 earnings form 8-K, July 25 2013, www.unitedcontinentalholdings.com [] [] [] [] []
  2. Alaska’s Q2 2013 earnings form 8-K, July 25 2013, www.alaskaworld.com [] []
  3. JetBlue’s Anchorage to Seattle Route is Now On Sale for as Low as $119, December 17 2012, www.jetblue.com []
  4. Alaska’s 2012 10-K, February 14 2013, www.alaskaworld.com []
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