United Continental To Show Improvement in Q1’17, Despite The Recent PR Debacle

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United Continental Holdings
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United Continental (NYSE:UAL) is scheduled to announce its first quarter 2017 earnings on the 17th of April. The fourth quarter was that of significant improvement for the company on the back of a lower than expected decline in unit revenues, and the 8.2% y-o-y growth in revenues from cargo. United is expected to stay on trend in the first quarter owing to dissipating of headwinds related to passenger yields, and capacity discipline practiced by the carrier. However, the higher oil prices may accentuate 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 has been in the news all this week due to the PR crisis it underwent, followed by the CEO Oscar Munoz’s response to that. While one may expect the stock to have plunged post the news, the drop is only slight at 3%. We do not expect the upcoming earnings to be consequentially impacted by the incident.
  • In the previous quarter, United saw lower than expected decline in unit revenues, mainly due to the robust performance by the carrier domestically due to stronger close-in bookings and yields in November and December, and in Latin America. However, the Atlantic and the Pacific regions continued to be under pressure. United expects its PRASM numbers to come in flat in Q1’17, as compared to the same period last year. The guidance implies a notable improvement.
  • The company’s system-wide capacity should come in slightly higher than the guided range of 1%-2% in the quarter, driven by higher completion factor. This, in addition to improvement in unit revenues, is likely to support the airline’s top line. Furthermore, a significant improvement of 11% y-o-y is also expected in the company’s cargo revenues.
  • We have recently seen some recovery in oil prices, owing to the OPEC countries’ decision to restrict their combined oil output by 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, crude oil prices have returned to the upper portion of their range of the last six months, reinforcing to investors that the commodity markets may be 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 5% y-o-y, in the March 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 2.0%- 2.25% in Q1’17 from 10% in Q4’16.

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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