United‘s (NYSE:UAL) third quarter top line rose by 3% annually to $10.2 billion on higher unit revenues (amount collected from passengers per seat for a mile of flight) driven by fare hikes and supported by a stable demand environment for flights. Driven by this top line growth and aided by lower fuel costs, the carrier’s profits also rose to $379 million in the third quarter, from a mere $6 million in the same period last year. 
In the third quarter, United continued to lower its flying capacity in an attempt to fly fuller planes. The carrier lowered its flying capacity by over 1% annually which pushed up its average occupancy rates (percentage of seats occupied by passengers in a flight) by 0.7 points annually to 85.9%. Higher occupancy rates helped expand margins and at the same time fewer gallons of fuel consumed due to lower flying capacity lowered fuel costs. This resulted in the strong growth seen in United’s profits in the third quarter.
See our complete analysis of United here. We are in the process of incorporating the carrier’s third quarter earnings and shall update our analysis shortly.
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United’s Unit Revenue Growth Could Improve
Though United’s profits grew strongly in the third quarter, we figure its performance could have been better given the results that some of its peers have posted. Delta (NYSE:DAL) posted third quarter profits of $1.4 billion driven by 4% year-over-year hike in its unit revenue, which is key measure that indicates a carrier’s passenger fares and flying capacity.  In comparison, United’s third quarter unit revenue grew by 2.7% annually.  United indicated during its earnings call that it possibly kept fares lower for longer periods due to flaws in its demand forecast methodology. This resulted in fewer full fare bookings which take place closer to the travel date. To ensure that it realizes more full fare bookings allowed by a certain demand environment, United emphasized that it was taking steps to correct these flaws.
Another factor which limited growth in United’s third quarter unit revenue was increased competition on some of its transpacific international routes to China which saw significant capacity additions from other U.S. airlines including Delta.
Rising Non-Fuel Unit Costs Impact Profits
Additionally, United’s non-fuel unit operating cost – which measures non-fuel cost incurred per seat for a mile of flight – continued to rise sharply in the third quarter. The carrier’s non-fuel unit operating cost grew at over 6% annually in the third quarter, compared to the 1% growth seen in Delta’s case.   The high rates of growth in United’s non-fuel unit operating cost indicate that the carrier has been unable to take steps to control the rise in these costs. We figure that the low rates of growth seen in Delta’s non-fuel unit operating cost over the past few quarters is due to gains from its structural cost-controlling initiatives launched last year. United on the hand is occupied with integrating the operations of Continental, which it acquired in late 2010. It is possible that in the next few years United will be able to control the growth in its non-fuel unit operating costs after it completes the integration of Continental. Delta too witnessed high rates of growth in its non-fuel unit operating costs until around a year back as it was occupied with integrating Northwest, which it acquired in 2008 – two years prior to the United-Continental combination. Post completion of the Northwest integration, Delta promptly launched its cost-controlling measures which included fleet restructuring and employee productivity improvements through the use of technology, among others to control the growth in its non-fuel unit operating costs.
On its part, United has come a long way from its losses of last year, which in part were due to a poor operational performance resulting from issues arising from the integration of Continental. However, the carrier still has to make much progress on some parameters such as unit revenue and unit costs to compete more effectively with peers. Jeff Smisek, United’s chief operating officer, said as much in the third quarter earnings release, “We are not satisfied with our financial performance and are taking prompt actions to increase our revenue and operate more efficiently across the company.”
Looking ahead, United plans to continue to reduce its flying capacity in the fourth quarter and expects its full year capacity to be down 1.2-1.4% annually.  This will likely continue to weigh on its passenger traffic but will also ensure fuller planes. The latter will boost profits.Notes: