United's EPS Strong, Revenue Lags - Analyst Blog

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The largest U.S. airline United Continental Holdings Inc. ( UAL ) reported fourth quarter 2011 adjusted earnings per share ( EPS ) of 30 cents, more than double of the Zacks Consensus Estimate. In the backdrop of rising fuel prices and a slow moving economy, the outstanding performance of the company was credited to fare hikes, cost-cutting measures and fuel hedging programs.

Adjusted earnings in the reported quarter exclude 72 cents per share in special items pertaining to merger-related costs and other one-time charges. Including these charges, United Continental generated a loss of 42 cents per share, considerably narrower than the year-ago loss of $1.01 per share.

In fiscal 2011, earnings, including special items, dropped 13.4% year over year to $2.26 per share. Earnings on an adjusted basis came in at $3.49 per share.

Revenue

Total revenue increased 5.5% year over year to $8.93 billion in the reported quarter, but was slightly below the Zacks Consensus Estimate of $8.95 billion. Airlines traffic, measured in revenue passenger miles, dipped 3.2% year over year. Capacity or available seat miles slid 2.5% while load factor (percentage of seats filled with passengers) fell 50 basis points year over year to 81.5%.

On an annualized basis, Passenger and Other revenues increased 5.6% and 10.1%, respectively, while Cargo revenue decreased 8.1%. Consolidated passenger revenue per available seat miles (PRASM or unit revenue) rose 8.2% year over year, led by a 11.7% spike in PRASM in Latin America and a 10.3% domestic growth.

For fiscal 2011, revenue increased 8.8% year over year to $37.1 billion. Traffic plummeted 1.4% year over year with a 0.2% dip in capacity and 100 bps contraction in load factor.

Operating Expenses

Total operating expenses, excluding special items, upped 7.3% year over year to $8.6 million in the reported quarter. Steeper expenses were largely due to a 25.1% year-over-year rise in fuel price, excluding the impact of hedges.

Consolidated unit cost or cost per available seat mile ( CASM ), excluding fuel, ancillary business expenses and special items, crawled up 1.3% year over year. CASM, including fuel and special items, rose 6.6% from the year-ago quarter.

Operating expenses, excluding special items, climbed 10.1% year over year for fiscal 2011, largely driven by substantial 36.5% increase in fuel price, excluding the impact of hedges.

Liquidity

At the end of fiscal 2011, the company had $8.3 billion in unrestricted liquidity including $7.8 billion in cash and short-term investments, and $500 million in undrawn revolving credit facilities.

United Continental generated operating cash flow of approximately $265 million and spent approximately $204 million in the fourth quarter.

Our Take

Notwithstanding higher fuel prices and the threat of recession looming large over Europe, United Continental is poised to benefit from Continental merger synergies, global network, leading unit revenue growth, strong competitive position, fleet and network optimization and a strong liquidity position. The strategy of combating the rise in fuel prices with higher fares and capacity cuts is also likely to continue.

Nevertheless, successful integration of Continental Airlines with United, competitive threats from larger peers like Delta Air Lines Inc. ( DAL ) and Southwest Airlines Co. ( LUV ), and unionized workforce might pose major risks to the company's profitability going forward.

We are currently maintaining our long-term Neutral recommendation on United Continental. For the short term, the stock retains a Zacks #3 (Hold) Rank.


 
DELTA AIR LINES ( DAL ): Free Stock Analysis Report
 
SOUTHWEST AIR ( LUV ): Free Stock Analysis Report
 
UNITED CONT HLD ( UAL ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CASM , DAL , EPS , LUV , UAL

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