Bloomberg News

United Misses as Profit Pared by Waning Demand, Fuel Gain

October 25, 2012

United Continental Holdings Inc. (UAL:US) Chief Executive Officer Jeff Smisek vowed to win back passengers who switched to other airlines in recent months because of chronic tardy flights.

The world’s largest carrier is trying to improve operations as it meshes its United and Continental units after 28 percent of flights arrived late during the third quarter and the number of passengers carried dropped 3.2 percent. That on-time arrival rate was considered low by U.S. industry standards, especially in a quarter that includes summer months free of snow.

“We recognize that some of our customers chose to fly other airlines during the summer when our operational performance degraded,” Smisek told analysts on a quarterly earnings conference call today. “Just like when your preferred road to work undergoes construction, you might choose to take a detour until the road gets repaired.”

United has increased staffing at airports and for maintenance workers, added more spare planes and improved the technology systems employees use for checking customers in, he said. Salespeople are calling on corporate customers to try to win them back by touting the Chicago-based carrier’s biggest route network and amenities such as lie-flat seats on all international wide-body planes by early next year, Smisek said.

Only 18 percent of United’s flights were late for September, beating a goal of no more than 20 percent.

“We expect to earn back those customers who took a detour,” said Smisek, who was CEO of Continental for just a few months when he oversaw talks to merge that carrier with United. “We are now running a reliable airline again.”

Quarterly Results

The missteps during the quarter contributed to a 1.3 percent drop in revenue for each seat flown a mile, an industry benchmark, on its main jet and regional operations, executives said. They declined to quantify how many passengers flew on other carriers or how much of the revenue slide was because of operational issues.

Third-quarter earnings excluding some items were $1.35 a share, trailing the $1.47 average of 17 analysts’ estimates compiled by Bloomberg, the carrier said today. The shares fell the most in almost three months.

The cost to fly each seat a mile increased 6.6 percent as the airline paid more for salaries and wages and maintenance.

“They have to get these costs under control,” said Helane Becker, a Dahlman Rose & Co. analyst in New York who rates United as hold. She said travelers will be mollified once delays and cancellations ease, because “people in general have very short memories.”

Net Income

Including $514 million in special charges, net income fell to $6 million, or 2 cents a share, from $653 million, or $1.69, a year earlier, United said in a statement. Revenue declined 2.6 percent to $9.91 billion, trailing the $9.97 billion average of estimates compiled by Bloomberg.

United fell 5 percent to $19.26 at the close in New York, its steepest slide since July 26 and the biggest drop among the 10 carriers in the Bloomberg U.S. Airlines Index. JetBlue Airways Corp. (JBLU:US) rose 1 percent to $5.25 after its profit beat estimates. Alaska Air Group Inc. (ALK:US), whose earnings matched analysts’ projections, dropped 0.5 percent to $38.17.

United is adjusting the size of planes on certain routes to match demand, such as moving some wide-body Boeing Co. (BA:US) 767s from U.S. service to international flights. Those planes are being replaced with single-aisle Boeing 757s operating between U.S. hubs such as Chicago and Houston.

Cost Cutting

“Every airline has to do a little bit of cost cutting because the world is a different place today than we thought six months ago, but there are some encouraging signs,” said Jeff Kauffman, a Sterne, Agee & Leach Inc. analyst in New York, who rates United as buy. “Despite all the doom and gloom, these airlines are making some pretty good money in a pretty slow environment.”

United is also trying to get joint labor contracts with most of its unions more than two years after the 2010 merger of former United parent UAL Corp. and Continental Airlines Inc.

Management reached an agreement in principle with Air Line Pilots Association negotiators in August, and both sides are working on the contract language. United recorded an expense of $454 million in the third quarter related to the new contract and lump-sum payouts pilots will receive when they ratify the accord and integrate seniority lists.

Executives declined to say more about the contract discussions on the conference call, or to say whether the pilots’ agreement will include some areas of savings or increased productivity to mitigate the higher pay.

JetBlue Profit

JetBlue said third-quarter profit climbed 29 percent as passenger traffic increased and revenue rose to a record after the carrier added flights to Boston and the Caribbean. The New York-based company also plans to buy back as many as 25 million shares over five years in its first stock repurchase program.

Net income climbed to $45 million, or 14 cents a share, from $35 million, or 11 cents, a year earlier, according to a statement. That exceeded the 13-cent average estimate from analysts surveyed by Bloomberg.

JetBlue said it would increase capacity between 5 percent and 7 percent this quarter, and 7 percent to 9 percent for the full year.

“We know what it feels like to grow too fast,” CEO Dave Barger said on a conference call. “We’re being quite responsible with the growth we have in place. To leave something unbuilt is irresponsible.”

Alaska Air

Alaska Air reported a profit of $2.09 a share excluding some items, matching the average estimate in a Bloomberg survey.

Traffic rose 7.2 percent as the Seattle-based carrier added flights to Washington, D.C., and Fort Lauderdale, Florida. Net income more than doubled to $163.4 million, or $2.27 a share, from $77.5 million, or $1.06, a year earlier.

Alaska Air is refining its service between California and Hawaiian destinations such as Honolulu and Maui to better match flight times and capacity to seasonal demand on each route, Chief Financial Officer Brandon Pedersen said in a telephone interview.

“What we want to do is just get a little smarter now, experiment with plane size and flight schedules,” he said. “At a top level, our Hawaii franchise is performing very well.”

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Victoria Stilwell in New York at vstilwell1@bloomberg.net.

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


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Companies Mentioned

  • UAL
    (United Continental Holdings Inc)
    • $47.61 USD
    • -0.71
    • -1.49%
  • JBLU
    (JetBlue Airways Corp)
    • $12.23 USD
    • -0.18
    • -1.47%
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