The largest U.S. airline United Continental Holdings Inc. (UAL) reported first quarter 2012 adjusted loss per share of 87 cents that narrowed from the Zacks Consensus Estimate loss of $1.11. However, the quarter’s loss was wider than the year-ago loss of 41 cents.
Though rising fuel prices and ongoing problems with the integration of Continental Airlines kept earnings at check, the better-than-expected performance was attributable to fare hikes, ongoing cost-cutting measures and fuel hedging programs.
Last month, United adopted a single loyalty program, Mileage Plus, after the passenger services for both United and Continental were combined. This combination resulted in glitches causing flight delays, problems at check-in kiosks and failing phone connections that took a toll on the demand for United Continental’s services in the quarter relative to its peer Delta Air Lines Inc. (DAL) ensuing in higher costs and revenue loss. In addition, the company also completed the transition of the Continental website into the new United website, technical issues notwithstanding.
Adjusted earnings in the reported quarter exclude 49 cents per share in special items pertaining to merger-related costs and other one-time charges.
Revenue
Total revenue increased 4.9% year over year to $8.60 billion and was above the Zacks Consensus Estimate of $8.58 billion. Airlines traffic, measured in revenue passenger miles, inched up 0.3% year over year. Capacity (or available seat miles) nudged up 0.3% and load factor (percentage of seats filled with passengers) rose 10 basis points year over year to 78.1%.
On an annualized basis, Passenger and Other revenues increased 5.5% and 3.5%, respectively, while Cargo revenue decreased 6.7%. Consolidated passenger revenue per available seat miles (PRASM or unit revenue) rose 5.2% year over year, led by a 7% spike in PRASM in Latin America and a 5.3% hike in Atlanta.
Operating Expenses
Total operating expenses, excluding special items, upped 7.6% year over year to $8.7 million in the reported quarter. Steeper expenses were largely due to a 20.8% year-over-year rise in fuel price, including the impact of hedges.
Consolidated unit cost or cost per available seat mile (CASM), excluding fuel, ancillary business expenses and special items, crept up 0.7% year over year. CASM, including fuel and special items, rose 8.3% from the year-ago quarter.
Liquidity
At the end of the first quarter, the company had $7.8 billion in unrestricted liquidity including $7.3 billion in cash and short-term investments, and $500 million in undrawn revolving credit facilities.
United Continental generated operating cash flow of approximately $124 million and spent approximately $403 million in the reported quarter.
Our Take
As reservation glitches are over, the future growth prospects of United Continental is expected to be solid based on improving air travel demand, rising unit revenue growth, fleet and network optimization, hedging strategy as well as merger benefits from Continental Airlines.
However, we believe surging fuel prices and the threat of recession in Europe pose downside risks to the stock. Additionally, high non-fuel costs related to fleet optimization and product initiatives, high unionization, new advertising rules, competitive threats, from larger peers like Delta and Southwest Airlines Co. (LUV) and risks pertaining to the Continental integration could hurt the company’s profitability going forward.
We are maintaining our long-term Neutral recommendation on United Continental. For the short term, the stock retains a Zacks #3 (Hold) Rank.
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