United cuts losses with fuller flights, higher fares
Looking ahead, the airliner anticipates to continue to improve its profits through lower capacity, interest payments and debt.
- In the first quarter, United posted moderate growth in its top line on gains from higher occupancy rates (the percentage of seats occupied in a flight) and passenger fares. The carrier cut its flying capacity to achieve this growth in its occupancy rates
- United's losses also declined, driven by lower merger related costs and interest payments
- Looking ahead, the company anticipates to continue to lower its flying capacity in an attempt to reduce the number of empty seats on its flights, which should in turn boost profitability
United Airlines (UAL) revenues increased by 1.4% year-over-year to $8.7 billion in the first quarter on gains from higher unit revenues -- the amount generated from each passenger for a mile of flight. The carrier also cut its losses to $417 million in the first quarter from $448 million in the prior year period driven by lower merger related costs and interest payments.
Importantly, United also improved its on-time performance with 81% of its flights arriving on-time in the first quarter. This helped the carrier post better results as passengers no longer shied away from the carrier because of its low on-time arrival rates. Last year, many passengers were driven away from the carrier due to its poor on-time performance, which had fallen to a low of 63% in July.
Looking ahead, United anticipates to continue to improve its profits through capacity rationalization and lower interest payments driven by lower debt. We currently have a stock price estimate of $32.60 for United, marginally above its current market price.
Capacity rationalization improved profitability
In the first quarter, United reduced its flying capacity in all markets to lower the number of empty seats on its flights. The carrier slashed maximum flying capacity from trans-Atlantic markets to Europe followed by the domestic U.S. markets and the international travel markets to Asia-Pacific and Latin America. Overall, United lowered its flying capacity by nearly 5% in the first quarter compared to the year ago period. This helped it improve its occupancy rates -- the percentage of seats occupied a flight -- by three points on a year-over-year basis to 81.1% in the first quarter.
United also realized slightly higher passenger fares reflected by growth in the yield levels. In all, fewer empty seats and higher fares improved the carrier's profits – indicated by nearly 6% year-over-year growth in unit revenues.
Losses decline on lower merger and interest costs
Additionally, United incurred $70 million in merger related costs in the first quarter down from $134 million in year ago period. This decline along with $15 million in lower interest payments, offset in part by an $11 million charge from the grounding of its 787 fleet, helped the carrier reduce its losses.
Lower interest payments were driven by lower debt. In the first quarter, United paid off $1.3 billion of its debt and capital lease to reduce its total debt to around $12.1 billion as of March 31. The carrier intends to pay down its debt by an additional $1 billion over the remainder of 2013. Thus, going forward, United's interest payments will likely continue to decline which will boost its profits.
Capacity rationalization to Continue in 2Q
In the second quarter, the carrier anticipates to continue to lower its flying capacity on all of its routes, except international routes to Latin America where it plans to raise its flying capacity by nearly 2% year-over-year. Overall, it plans to lower its flying capacity between 1.7% and 2.7% year-over-year in the second quarter in an attempt to continue to improve its occupancy rates and profitability.
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.