How Will United Continental’s Re-fleeting Initiatives Contribute To Its Earnings?

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To bring United back to its past glory days, CEO Oscar Munoz has laid down a comprehensive path to improve its long-term earnings growth through a number of strategic initiatives, aimed at commercial enhancements, and improving cost, and operational efficiency. The new strategy is expected to generate $4.8 billion incremental earnings by 2020 for United. In an earlier article we discussed United’s plan to optimize its network potential, by shifting the focus back to domestic routes. This move alone is expected to add $1.45 billion to the company’s earnings by 2020.

In this article we discuss United’s re-fleeting and upgauging plan and its contribution toward the company’s earnings.

Slimline and Upgauge Programs

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United Continental Airlines, along with all other airlines, has benefited hugely from the low oil prices. Consequently, the low cost environment has enabled the carrier to refurbish, upgauge, and add more capacity to its fleet. While refurbishing helps the company provide its clients with a more convenient and comfortable flying experience, fleet replacement reduces its expenditure on depreciation and helps save fuel costs.

Under its re-fleeting initiative, the carrier will begin getting rid of its 50-seater regional jets, while adding to the number of seats.

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As of 2015, the number of seats per departure stood at 105. The company, with the help of its upgauging initiatives, hopes to increase this number to 119 in 2020. As a part of its upgauging initiative, United will be installing slimline seats, which although less comfortable, are effective in driving down unit costs. Consequently, in addition to an increment to earnings, we can expect to see some improvement in the company’s margins.
07121Furthermore, United plans to defer the delivery of 61 Boeing 737 jets for an unspecified period. Earlier in the year, the carrier had ordered 65 737-700s. The delivery was due in early 2017, when they would have been converted to the new Max model. As of present, the company will only take the delivery of four of the said planes and convert them to 800s. It has shown interest in Boeing’s 737 Max to replace some of the single-aisle jet orders it has deferred as part of a cost-savings push. The carrier is also considering whether to alter a $12.4 billion order for Airbus 350-1000 jets, it placed in 2013, with smaller long-range models. This is an effort to save $1.6 billion in capital expenses over the next two years.

Growth In Economy Plus And First Class Seats

United has had a premium seating service, called Economy Plus, for many years now. However, the service and visibility has considerably lagged that offered by its competitors such as Delta, and even smaller players like JetBlue. However, the company is now renewing its focus on segmentation and bundling of fares and ancillary products. It hopes to capitalize on the improving consumer sentiment, and demand for air travel by increasing the number of seats in the Front Cabin and Economy Plus by 1.7% and 0.9%, respectively, by 2020. However, if the company is unable to differentiate itself from its peers, we may not see a huge benefit in terms of the increment to the bottom line, although we can expect revenue from ancillary services to grow.07122

The airline expects to see Economy Plus revenues increase by 20% and premium cabin revenues grow by 30%  in the next two years.

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Accretion To Earnings

United expects its re-fleeting and upgauging initiatives to become accretive to earnings in 2016 itself. The revised improvement in earnings from these initiatives is as follows:

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Have more questions about United Continental (NYSE:UAL)? See the links below:

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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