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United Continental (UAL) Q4 Earnings Surpass, Decline Y/Y


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United Continental HoldingsUAL reported better-than-expected earnings and revenues in the fourth quarter of 2017. The company's earnings (excluding 59 cents from non-recurring items) came in at $1.40 per share, beating the Zacks Consensus Estimate of $1.34. The bottom line was however, 21.4% lower than the year-ago figure due to higher costs.

Operating revenues of $9,438 million in the fourth quarter were also ahead of the Zacks Consensus Estimate of $9,427.9 million. The top line also increased 4.3% year over year.

Operating Results

The company reported a marginal year-over-year rise in consolidated passenger revenue per available seat mile (PRASM: a key measure of unit revenues) to 12.43 cents.

Yield on a consolidated basis inched up 0.9% from the fourth quarter of 2016 while passenger revenues climbed 4.1% to $8,080 million. Cargo revenues increased 21.6% and other revenues grew 1.2% in the said time frame. Higher international freight volumes and yields boosted cargo revenues in the quarter.

During the reported quarter, airline traffic measured in revenue passenger miles, improved 3.1% year over year on a consolidated basis. Capacity (or available seat miles) rose 4%. Load factor (percentage of seat occupancy) declined 70 basis points to 81.7% as capacity expansion outpaced traffic growth. Average fuel price per gallon (on a consolidated basis) excluding hedge loss escalated 19.4% year over year to $1.91.

Total operating expenses jumped 8.2% year over year to $8.7 billion. Consolidated unit cost or cost per available seat mile (CASM) - excluding fuel, third-party business expenses and profit sharing - nudged up 1.5% year over year, primarily on the labor deals inked by the company. During the quarter under review, United Continental bought back $553 million of its common stock.

United Continental Holdings, Inc. Price, Consensus and EPS Surprise

United Continental Holdings, Inc. Price, Consensus and EPS Surprise | United Continental Holdings, Inc. Quote




Liquidity

United Continental exited the fourth quarter with $5.8 billion in unrestricted liquidity, which included $2 billion of undrawn commitments under its revolving credit facility. This Zacks Rank #3 (Hold) company generated $728 million as operating cash flow in the quarter under discussion. Free cash outflow (adjusted) at the end of the quarter was $318 million. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Expansion and Fleet Upgrade Efforts in 2017

The company, constantly looking to grow and upgrade its fleet, made a substantial progress in expansion and fleet upgrade during 2017. The company announced 44 new domestic routes from seven of its mainland hubs and increased frequency on 11 routes to the Hawaiian Islands. Additionally, the carrier announced 13 new global routes last year.
During the same period, the airline took delivery of 19 Boeing aircrafts, including 12 777-300ER, three 787-9 and four 737-800. Also, eight used Airbus aircrafts including two A320 and six A319 were purchased by the company.

The carrier has also announced an agreement with Airbus for changes in its A350 order. The contract calls for conversion of the model type from A350-1000 to A350-900, an increase in the order size from 35 to 45 aircrafts and a postponement of the first delivery to 2022. On another agreement announced with Boeing, the company wishes to convert 100 of its existing 737 MAX orders into 737 MAX 10 aircrafts, beginning late 2020.

Q118 Guidance

For the first quarter of 2018, the carrier anticipates capacity to expand between 3.5% and 4.5%. Pre-tax margin (adjusted) is expected to be flat year over year. First-quarter consolidated passenger revenue per available seat mile (PRASM) is predicted to be flat to up 2% year over year. Consolidated cost per available seat mile (CASM) excluding third-party business expenses, fuel & profit sharing is estimated in the range of flat to up 1% in the first quarter. While first-quarter consolidated average aircraft fuel price per gallon is predicted at approximately $2.11. Additionally, Effective Income Tax Rate in the first quarter is expected between 22% and 24%.

2018 Outlook

For 2018, the company expects capacity to augment between 4% and 6% year over year. Moreover, a similar growth in the metric is forecast in 2019 and 2020. The carrier's move to inflate capacity in 2018 has not gone down too well with investors. Consequently, shares of the company were down 6.4% in after-hours trading on Jan 23.

Notably, the airline's move seems prudent as it aims to compete with low-cost carriers. However, it remains to be seen how the low fares affect the company's bottom line going forward.

The move also led to share price decline of other airline heavyweights like Delta Air Lines DAL and American Airlines AAL in after market.

Additionally, the company expects 2018 earnings per share between $6.50 and $8.50, while capex is anticipated in the range of $3.6 billion-$3.8 billion.

Benefits of the Tax Reform

The Tax Cuts and Jobs Act, put into effect on Dec 22, 2017, is expected to reduce the company's federal income tax liability this year onward. Notably, the new tax law lowers corporate tax rate to 21% from 35%. For 2018, the company projects a tax rate of around 22-24%. Net operating loss carry forwards are anticipated to offset the company's taxable income and no cash taxes are likely to be paid in 2018.

Upcoming Release

Investors interested in the airline space now keenly await fourth-quarter earnings report of Southwest Airlines LUV , scheduled to be out on Jan 25.

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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 Nasdaq, Inc.



This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: LUV , DAL , UAL , AAL


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