United Continental Q3’16 Earnings Preview: Capacity Cuts To Partially Offset The Decline In PRASM

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UAL: United Airlines Holdings logo
UAL
United Airlines Holdings

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Key Trends:

  • United revised its PRASM guidance from a decline of 5.5%-7.5% to 5.5%-6.0%, implying a small improvement, likely due to the reduction in capacity over the past quarter and better than expected September close-in bookings driven by the timing of certain holidays. However, the drop in passenger unit revenue continues to be significant, attributable mainly to competitive pressure from smaller carriers like JetBlue and SouthWest and a strong dollar. Below we give a break up of the effect various factors are likely to have on United’s unit revenues in the third quarter of 2016.

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  • The company’s system-wide capacity should come in the range of its previous guidance of approximately 2%. The moderation in capacity will continue to support the airline’s bottom line, partially offsetting the negative impact of higher fuel cost and operating expenses excluding fuel.
  • We have recently seen some recovery in oil prices, owing to the OPEC countries’ decision to restrict their combined oil output between 32.5 and 33 million barrels per day, a potential reduction of 200 to 700 MBPD (thousand barrels per day) compared to the output in August. However, the increase is unlikely to have any material impact on the fuel expenditure of the airline in the quarter, as the prices continue to be much lower than the historical $100 per barrel.
  • United’s pre-tax margins are expected to be up sequentially, by roughly 5 percentage points, owing to the lower fuel expense. However, this will be partially offset by the company’s non-fuel operating expenses, which are expected be on the higher end of the guidance range due to the recently ratified labor agreement with pilots and flight attendants.
  • In a bid to attract more traffic, United is increasingly focusing on expansion into China. With 14 destinations in Asia, United currently holds the largest amount of capacity of any airline between the U.S. and China. To continue growing aggressively, they plan to connect more second-tier cities in China to the U.S. Consequently, it has already partnered with a local carrier, Air China, in the country. The partnership includes code-sharing on selected routes and provides customers with travel benefits, such as airport lounge access and frequent flyer program reciprocity. The deal will allow United to launch more flights to cities in China in the coming years.
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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

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