The stock price of
United Continental Holdings Inc.
) plunged over 9.28% to close at $30.91 on Nasdaq last Friday
after the premier passenger carrier reported weaker PRASM
(passenger revenue per available seat mile) expectations for the
third quarter of 2013. Weaker-than-expected international
revenues can be traced back to the subdued guidance.
The Chicago-based carrier expects unit revenue growth of
around 2.5-3.5% for the third quarter as compared to the previous
guidance of 3-5% provided in Jul 2013. The company cited that the
reduction is due to lower passenger pay per mile in some of its
trans-Atlantic route and addition of capacity in China by
The new guidance suggests that the PRASM for Sep, 2013, is
quite weak as United Airlines has already reported PRASM growth
of around 3.5-4.5% in Jul and Aug 2013. Shareholders reacted
negatively to the news, bringing about the biggest drop since Oct
Notably, China is one of the most important markets for the
airline giant and the carrier continues to add new routes to
increase its exposure in the world's second largest economy.
However, China's attractiveness as a business destination has
drawn many airline companies to increase their presence in the
country. This, in turn, has enhanced the seat availability thus
affecting the trans-Pacific unit revenue.
United Airline's earnings performance has also been
unimpressive as it suffers a high cost structure as compared to
Delta Airlines Inc.
). United Airlines also lags Delta in fleet restructuring effort.
While Delta expects operating margin around 10-11% this year,
United guides an operating margin of around 8.5% for the
Despite such negatives, the company remains profitable thanks
to strong industry fundamentals. The airline industry has mostly
outperformed the broader market and UAL is no exception. However,
we remain sceptical about the high costs and slower fleet
restructure of United Airlines, which could impact the company's
United currently carries a Zacks Rank #3 (Hold). However,
sector stocks of
Republic Airways Holdings Inc.
Cathay Pacific Airways Limited
) look attractive with a Zacks Rank #2 (Buy).
CATHAY PAC AIR (CPCAY): Get Free Report
DELTA AIR LINES (DAL): Free Stock Analysis
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UNITED CONT HLD (UAL): Free Stock Analysis
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