The largest U.S. airline
United Continental Holdings Inc.
) reported lackluster performance in the second quarter of 2012.
Adjusted earnings of $1.41 per share missed the Zacks Consensus
Estimate of $1.69 and decreased 5.4% from the year-ago quarter.
During the last two months of the quarter, fuel price, the major
threat to the company's profitability, dropped to a certain extent,
giving some relief to the company's fuel cost. But at the same
time, the shift to a single passenger service system and the new
procedures related to Continental merger actions took a toll on the
demand for United Continental's services in the quarter, ensuing in
higher costs and revenue loss.
Adjusted earnings in the reported quarter exclude 52 cents per
share in special items pertaining to merger-related costs and other
one-time charges. Including these charges, earnings dropped 36%
year over year to 89 cents.
Total revenue increased 2.4% year over year to $9.9 billion but was
below the Zacks Consensus Estimate of $10.0 billion. Airlines
traffic, measured in revenue passenger miles, inched up 0.5% year
over year. Capacity (or available seat miles) slid 0.6% while load
factor (percentage of seats filled with passengers) grew 90 basis
points year over year to 84.3%.
On an annualized basis, Passenger and Other revenues increased 2.3%
and 11%, respectively, while Cargo revenue decreased 16.1%.
Consolidated passenger revenue per available seat miles (PRASM or
unit revenue) rose 3% year over year, led by 8.5% spike in regional
PRASM and 6.6% hike in PRASM in Pacific.
Total operating expenses, excluding special items, rose 3.4% year
over year to $9.2 million in the reported quarter.
Consolidated unit cost or cost per available seat mile (CASM),
excluding fuel, third-party business expense and special items,
crept up 2.8% year over year. CASM, including fuel and special
items, rose 4.6% from the year-ago quarter.
At the end of the second quarter, the company had $8.2 billion in
unrestricted liquidity including $7.7 billion in cash and
short-term investments, and $500 million in undrawn revolving
United Continental generated operating cash flow of approximately
$959 million and spent approximately $500 million in the reported
Despite the lingering economic woes, United Continental is expected
to benefit from improving air travel demand, Continental merger
synergies, global network, rising unit revenue growth, strong
competitive position, fleet and network optimization, hedging
strategies and a strong liquidity position. These strong attributes
would also provide the company a competitive edge over its major
Southwest Airlines Co.
Delta Air Lines Inc.
Further, falling fuel cost would likely offset costs related to
fleet optimization and product initiatives, leading to more
profits. The integration of Continental has also helped United to
bolster its domestic and international footprints.
Based on falling fuel prices and strong future growth prospects, we
recently upgraded our recommendation on United Continental to
Outperform. For the short term (1-3 months), the stock holds a
Zacks # 2 (Buy) Rank.
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UNITED CONT HLD (UAL): Free Stock Analysis
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