Bloomberg News

United Finds Almost $1 Billion in Cost Cuts as Earnings Miss

October 24, 2013

United Continental Holdings Inc. Aircraft

United Continental Holdings Inc., the biggest U.S. carrier on routes to China, warned last month that airlines’ rising seating capacity across the industry on those flights was eroding fares, damping revenue from each seat flown a mile, an industry benchmark. Photographer: Brent Lewin/Bloomberg

United Continental Holdings Inc. (UAL:US), struggling to match other airlines’ profit gains, said it has identified ways to cut costs by almost $1 billion and shifted its biggest planes to different routes to boost revenue.

Shuffling the flights that use Boeing Co. 747 jumbo jets will create a $40 million annual benefit and is among changes to respond to a revenue shortfall that led to third-quarter profit missing analysts’ estimates, United said today.

Chief Executive Officer Jeff Smisek and top managers outlined the steps on a conference call after saying quarterly sales also trailed estimates. Chicago-based United, which merged with Continental Airlines in 2010, said it’s making changes to a revenue management system that sold too many seats at lower fares and set a goal of capping increases in a benchmark expense gauge at the inflation rate.

“United has not just been going the wrong way profit-wise, it seems to have squandered so far the promising potential that had seemed so obvious” with the 2010 merger that combined the networks of United and Continental Airlines, Vicki Bryan, a senior bond analyst at New York-based Gimme Credit LLC, said in a note.

The shares (UAL:US) rose 1.1 percent to $31.30 at the close in New York. While United has rallied 34 percent this year, that’s only the seventh-biggest gain among the 10 carriers in the Bloomberg U.S. Airlines Index.

‘Too High’

“There’s no question that our costs are too high,” Smisek said on the call. “We have significant opportunities to run a quality operation with quality customer service and be far more efficient than we are today.”

Chief Financial Officer John Rainey set the cost-cutting opportunities at about $1 billion, while declining to commit to that figure as a goal. He said United wanted to wait “until we can provide some specificity” to investors next month.

United said it’s making changes to a revenue management system that led to selling too many low fares for too long, resulting in more seats filled per plane but at reduced rates. Further changes will occur next month to reflect recent demand trends, Chief Revenue Officer Jim Compton said. Those tweaks won’t have a full effect until 2014’s first half, he said.

Sales rose 3.2 percent to $10.2 billion, missing the $10.3 billion average estimate of 10 analysts surveyed by Bloomberg. Profit excluding some costs was $1.51 a share, United said. That fell short of the $1.55 average estimate.

China Competition

United, the biggest U.S. carrier on flights to China, also saw revenue falter as competitors added service to the world’s most populous country. Passenger revenue in the Pacific region dropped 11 percent, United said, after telling investors last month that an increase in industrywide seating capacity to China was eroding fares.

The carrier’s performance contrasted with revenue gains at Delta Air Lines Inc., AMR Corp.’s American Airlines and US Airways Group Inc., each of which reported record sales.

“Clearly they are not performing as well, haven’t performed as well, as the rest of the industry,” Bob McAdoo, an Imperial Capital LLC analyst in Los Angeles, said in an interview. He rates the stock outperform.

Passenger traffic on United’s main jet fleet fell 0.3 percent as the average fare per mile rose 0.8 percent. Revenue for each seat flown a mile increased 1.6 percent, while costs on the same basis and excluding special items rose 5 percent.

Pacific Decline

United’s Pacific region was the only one at the airline with declines last quarter in industry benchmarks such as revenue for each seat flown a mile and the average fare for each mile flown, according to today’s statement. The airline faces new service on China-U.S. flights this year from Delta, China Eastern Airlines Corp. (670) and Air China Ltd. (601111)

“Advance booked seat factor,” a measure of future demand, is down 3.3 percentage points on flights across the Pacific over the next six weeks compared with a year earlier, United said today. That gauge is up 0.5 point for trans-Atlantic flights and 0.6 point for service to Latin America, United said.

United’s net income (UAL:US) rose to $379 million, or 98 cents a share, including $211 million in costs for merger integration and lump sum cash payments under a tentative labor agreement. That increased from $6 million, or 2 cents, a year earlier, when $514 million in special charges were recorded.

Today’s release made United the last of the five largest U.S. airlines to announce quarterly results. Southwest Airlines Co., the only other carrier in that group that reported today, posted a profit that matched analysts’ estimates. Alaska Air Group Inc. (ALK:US)’s adjusted profit beat estimates on that basis.

To contact the reporter on this story: 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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Companies Mentioned

  • UAL
    (United Continental Holdings Inc)
    • $45.7 USD
    • 0.53
    • 1.16%
  • ALK
    (Alaska Air Group Inc)
    • $49.34 USD
    • 0.33
    • 0.67%
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