United’s Unit Revenues To Show Improvement in Q4’16, But Higher Costs To Be A Drag On Earnings

January 13th, 2017 by Trefis Team

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UAL

United Airlines Holdings

United Continental (NYSE:UAL) is scheduled to announce its fourth quarter and full year 2016 earnings on the 19th of January. While the third quarter was difficult for the company, as is evident through the decline seen in revenues (-4% y-o-y) and earnings per share (-77% y-o-y), the company is expected to see significant improvement in the fourth quarter owing to dissipating of headwinds related to passenger yields. However, the higher oil prices on the back of OPEC’s decision to cut oil production may continue to hamper the downside in the upcoming results. In the following article we discuss some of the trends which are expected to be seen in the upcoming quarterly results.

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Key Trends:

United revised its PRASM guidance from a decline of 3%-4% to a decline of 1.25%-1.75% in the December quarter, implying a notable improvement, likely due to the reduction in capacity over the past quarter and better than expected December close-in bookings. The enhancement was further supported by the stronger than expected business demand in the two weeks prior to Christmas, and better than expected leisure demand around the holidays. However, the full year PRASM’s are likely to continue to fall approximately 5.4% y-o-y due to the headwinds in the Atlantic and Pacific region.

The company’s system-wide capacity should come in the range of its previous guidance of approximately 2% in the quarter. The moderation in capacity, in addition to improvement in unit revenues, is likely to support the airline’s top line, more than offset by the 30 bps decline in occupancy rate.

We have recently seen some recovery in oil prices, owing to the OPEC countries’ decision to restrict their combined oil output to 1.2 million barrels of oil per day (Mbpd) over the coming months. In addition to this, the Non-OPEC members, such as Russia, also supported the OPEC’s move by offering to bring down their production by roughly 600,000 barrels of oil per day. In response to the news, crude oil prices have shot up by almost 20% over the last one month, reinforcing to investors that the commodity markets are on the path of recovery. The increase is likely to impact the airline’s fuel expenditure, but not by much, as the prices continue to be much lower than the historical $100 per barrel.

Excluding the costs associated with fuel, the company will see its unit costs rise significantly, at approximately 4% y-o-y, in the December quarter. A majority of this increase is attributable to United’s recently ratified labor agreements with the pilots, flight attendants, technicians, IAM-represented employees, and dispatchers.

The higher fuel and non-fuel costs are expected to burden the company’s bottom-line, affecting earnings per share adversely. Consequently, United’s pre-tax margins are expected to come down to 9.25%-9.75% in Q4’16 from 15% in Q3’16.

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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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