Bloomberg News

United Joins US Airways in Profit Drop as Fuel Trumps Fares

October 27, 2011

(Updates share prices in seventh paragraph.)

Oct. 27 (Bloomberg) -- United Continental Holdings Inc. and US Airways Group Inc. said third-quarter profit tumbled as jet- fuel costs overpowered higher fares during the peak summer travel season.

United’s earnings excluding some items slid 14 percent to $773 million, or $2 a share, missing the $2.08 average estimate from 14 analysts. US Airways posted a 68 percent drop in net income to $76 million, or 41 cents a share.

Jet-fuel bills surged to become the biggest cost for both airlines, exceeding salaries and wages. United and US Airways each trimmed capacity about 1 percent and said planes were more than 85 percent full.

“Seats are filling, the customers are paying higher prices, they are controlling costs, so the story is great,” Jeffrey Kauffman, managing director of equity research at Sterne Agee & Leach Inc., said in an interview. “What’s hitting a lot of carriers this quarter is fuel.”

Jet-fuel costs climbed 33 percent to $3.37 billion for United and 45 percent to $905 million at US Airways. Results from the two carriers brought the collective third-quarter profit for the seven biggest U.S. airlines to $1.76 billion, excluding some items. American Airlines parent AMR Corp. was alone in posting a loss, at $162 million.

In addition to fuel-cost increases, some carriers also made wrong-way bets by signing advance purchase contracts that locked them into higher prices. For example, United had a $56 million charge on “fuel hedge ineffectiveness.”

Continental Merger

United shares fell 1.1 percent to $20.11 at 4:15 p.m. in New York, the worst performer among 10 carriers in the Bloomberg U.S. Airlines Index, while US Airways rose 3 percent to $5.83.

United, based in Chicago, said its one-time items during the third quarter totaled $120 million, mostly related to the integration with Continental Airlines Inc. after an October 2010 merger. The all-stock deal created a larger company than Delta Air Lines Inc., previously the world’s biggest carrier.

Including those items, United’s net income fell 23 percent to $653 million, or $1.69 a share, from $852 million, or $2.16 a share, a year earlier, according to the statement.

Sales rose 8.7 percent to $10.2 billion, helped by an increase of about 10 percent in revenue for each seat flown a mile.

United achieved “good revenue results in a challenging economic environment,” Chief Revenue Officer Jim Compton said in a statement.

Available Seats

The carrier expects to receive a single operating certificate from the Federal Aviation Administration by the end of this year, and it plans to combine the two airlines’ passenger service systems during the first quarter of next year.

United plans to keep capacity little changed next year because of the slow-growing economy. The carrier is considering a new narrow-body jet order and is “visiting on that right now,” Chief Executive Officer Jeff Smisek said on a conference call. He wouldn’t say when United plans to make a decision, or how many aircraft it may purchase.

US Airways, based in Tempe, Arizona, said profit excluding one-time items was 51 cents, topping the 48-cent average estimate among analysts.

Sales increased 8.1 percent to $3.44 billion, helped by a 9.4 percent jump in revenue for each seat flown a mile.

Demand and pricing remain “strong” this quarter, President Scott Kirby said on a conference call.

“I know many of you are looking for the canary in the coal mine that industry revenues are turning down, but we just haven’t seen it yet,” Kirby said.

United and US Airways executives said travel demand from banking and financial services is weaker than other corporate accounts. Pharmaceuticals, oil and consulting customers are “stable,” United said.

--Editors: James Langford, Ed Dufner

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net.


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