United Continental Holdings Inc. (UAL), the holding company for both United Airlines and Continental Airlines, reported its individual third quarter earnings on October 21, 2010. The combined results will be produced by the company with its fourth quarter results.
United Continental Holdings has been newly formed by the merger of Continental Airlines with UAL Corp. on October 1, 2010. The merger has created the world’s largest airline, overtaking Delta Airlines (DAL), which acquired Northwest Airlines in 2008.
United Airlines is on track for a profitable year after a long drought through its merger. The company is benefiting from the rebound in traffic, including an increase in business travel and premium service demand, as well as high fares.
Earnings
United Airlines: United Airlines reported adjusted earnings per share of $2.12 compared with net loss per share of 41 cents in the year-ago quarter.
Continental Airlines: Continental generated adjusted earnings of $2.24 per share compared with 2 cents in the year-ago quarter.
United and Continental’s improvement in earnings were led by strong business and overseas travel demand.
Revenue
United Airlines: United Airlines’ total revenue climbed 21.7% year over year to $5.4 billion in the third quarter. Airline traffic is measured in billions of revenue passenger miles (RPMs), which is the revenue generated for every mile a passenger flies. Consolidated RPMs grew 3.9% while capacity or available seat miles increased 2.6% year over year, resulting in a load factor (percentage of seats filled by passengers) of 85.9%, up 100 bps year over year. Passenger revenue per available seat mile saw an 18.3% jump from the year-ago quarter.
On an annualized basis, Passenger revenue increased 21.4% while Other revenue rose 16.8%. Cargo revenue shot up 40% year over year owing to improvement in both volume and yields across all regions, particularly trans-Pacific markets, driven by the growing cargo demand.
Continental Airlines: Continental’s total revenue was $4 billion, up 19.2% year over year during the reported quarter. Consolidated RPMs grew 1.6% while capacity increased by a modest 0.6% year over year, resulting in a load factor increment of 80 bps to 85.9%. Passenger revenue per available seat mile climbed 19.8% year over year.
On an annualized basis, Passenger revenue increased 20.6% while Other revenue inched up 1.8%. Cargo revenue shot up 25% year over year attributable to increased freight volume.
Operating Expenses
United Airlines: Total operating expenses, excluding special items, increased 10.7% year over year. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, upped 5.7% year over year, while CASM, including fuel, increased 7.9% year over year.
Continental Airlines: Total operating expenses, excluding special items, increased 8.1% year over year, primarily from higher fuel costs. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, upped 6.3% year over year, while CASM including fuel grew 7.5% year over year.
Liquidity
The combined company ended the quarter with cash equivalents including short-term investments of $9.1 billion. United Continental generated combined operating cash flow of approximately $750 million and spend approximately $185 million during the reported quarter.
Our Analysis
The newly formed company is expected to enjoy a favorable position in an increasingly competitive global and domestic aviation industry and perform better than any airline standing alone. The combined entity is expected to generate net annual synergies of $1 to $1.2 billion by 2013, with $800 to $900 million in additional revenue and $200 to $300 million in cost savings. However, United Continental expects the integration process to take 12 to 18 months.
United Continental will leapfrog Delta, Air France-KLM and American Airlines, a wholly owned subsidiary of AMR Corporation (AMR). It will likely have one of the industry’s best cash positions, industry-leading revenues and a competitive cost structure. The strong liquidity gives the new company a flexibility to pay down its debt.
We are currently maintaining our Neutral recommendation, supported by our Zacks #3 Rank (Hold).
