Lower passenger traffic, superstorm Sandy and integration
related costs, severely impacted fourth quarter profits of
United
(
UAL
). The airline posted a loss of $620 million in the fourth quarter,
compared to a loss of $138 million for the same period in the
previous year. Revenues of the carrier also declined 2.5%
year-over-year to $8.7 billion in the fourth quarter.
For the full year 2012, United posted a loss of $723 million as
$1.3 billion in special items including integration related costs,
labor agreement costs and voluntary severance charges, impacted its
earnings. The carrier also missed its revenue goals for 2012
as several integration related issues impacted its operational
performance.
Looking forward at 2013, with much of United-Continental merger
complete, the carrier forecasts better performance in terms of
both, operational parameters and earnings.
See our complete analysis of United here
Lower Capacity Impacts Passenger Traffic
In 2012, United started service to several international
destinations including Istanbul, Manchester, Dublin, Buenos Aires,
Monterrey, San Salvador, Kelowna and Doha. The carrier also
started service on 18 domestic U.S. routes. However, these new
flights were not able to offset the decline in its capacity on
other routes.
In the fourth quarter, United lowered its net capacity on
domestic U.S. routes due to stiff competition from low-cost
carriers. It also lowered its capacity on Atlantic international
routes to Europe due to falling demand, resulting from the
sovereign debt crisis in the region. In all, United lowered its
capacity by 4.2% y-o-y in Q4. This impacted its passenger traffic,
which declined 3.2% y-o-y. Coupled with marginally lower passenger
fares, overall passenger revenue for United declined 3.6% y-o-y, to
$7.5 billion in the fourth quarter.
Superstorm Sandy
Superstorm Sandy which struck northeast United States in last
week of October and first week of November, cancelling
approximately 15,000 flights also reduced fourth quarter revenues
of United by $140 million and profits by $85 million.
United-Continental integration and special items
Fourth quarter profits of the carrier were also reduced by
United-Continental integration costs of $408 million.
Integration costs include compensation costs related to systems
integration and training, costs to repaint aircraft and other
branding activities, costs to write off facilities that are no
longer in use, and severance charges associated with headcount
reductions. For full year 2012, integration related costs totaled
$739 million, up from $517 million in 2011.
Apart from exerting direct costs, the integration between United
and Continental also reduced revenues and earnings in 2012, by
impacting operational performance. The two carriers moved on to a
common IT platform in March 2012, resulting in a common booking
website. However, the system malfunctioned three times leading to
flight delays and several cancellations in each instance.
Consequently, the on-time performance of the carrier suffered in
2012. Lower on-time performance hurt its credibility and impacted
growth.
Although in Q4, on-time performance of United improved
sequentially, but it was still below its previous year levels.
Additionally, at the fourth quarter earnings release, United's vice
chairman and chief revenue officer, Jim Compton, said, "We have
addressed the integration issues that drove our
underperformance [in 2012]." So going forward we could see
improved on-time performance from United.
In 2012, profits of the carrier were also impacted by $475
million in labor agreement costs and $125 million in voluntary
severance charges.
Outlook for 2013
In 2013, the carrier forecasts to continue to reduce its
capacity, in an attempt to improve its load factors (percentage of
occupied seat in a flight) and thereby its profitability. However,
lower capacity will continue to impact growth in its passenger
traffic.
On the bright side, United will start taking deliveries of 50
new Boeing 737 Next Generation aircraft in 2013. These will replace
older, less-efficient aircraft in its fleet, and thus contribute to
fuel and maintenance savings.
We currently have
a stock
price estimate of $21.31 for United
, approximately 15% below its current market price. We are in the
process of incorporating fourth quarter earnings, and shall update
our analysis shortly.
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