United Continental Holdings Inc. ( UAL ) expects strong growth in the ongoing fourth quarter and fiscal year in the back drop of rising fuel prices and a slow moving economy.
The largest U.S. airline expects passenger revenue per available seat miles (unit revenue) to grow 8.5-9.5% in the current quarter and 9-10% in fiscal 2011. Airlines traffic, measured in revenue passenger miles implying one mile flown by one passenger, is expected to drop 3-4% for the fourth quarter and 1-2% for the year.
United Continental is undertaking several initiatives to lower its overall cost including fuel price. It expects fuel prices to be $3.22 per gallon and $3.07 per gallon for the ongoing quarter and fiscal year, respectively. The company has managed to successfully pass the increased fuel cost to customers in the form of fare hikes. United Continental has imposed about 10 broad fare increases this year.
The company believes that capacity reduction is another way of managing fuel costs and accordingly, has trimmed its consolidated capacity by 2.9% in the current quarter, with 4.8% in domestic flights and 0.2% internationally. For fiscal 2011, the company expects consolidated capacity to fall 0.3% from the 2010 level.
Additionally, United Continental has a risk management strategy in place to hedge a portion of its expected jet fuel requirements. In the fourth quarter, United Continental is 56% hedged using a combination of calls, swaps and collars. For the first two quarters of 2012, United Continental has hedged a respective 47% and 36% of its expected consolidated fuel consumption.
The company is also focusing on streamlining its costs by reducing non-fuel expenses. Consolidated unit cost (or cost per available seat mile), excluding fuel and special items, is expected to be up 2.2-2.7% and 2.1-2.4% year over year in the fourth quarter and fiscal 2011, respectively. The decline in non-fuel expenses is expected to aid cargo and other revenue to grow up to $1.04-$1.08 billion in the fourth quarter and $4.28-$4.31 billion in 2011.
The Zacks Consensus Estimate projects earnings per share of 46 cents for the fourth quarter and $3.70 for the full year.
Besides, United Continental, which competes strongly with Delta Air Lines Inc. ( DAL ), AMR Corporation ( AMR ) and Southwest Airlines Co. ( LUV ), continues to have a healthy balance sheet. The company expects to exit the year with cash equivalents, including short-term investments, of $8.3 billion.
United are seemingly following the same trends as Delta, which announced its projections earlier this month. Delta Air Lines is cutting its consolidated capacity by 4-5% for the fourth quarter and expects to earn a profit of $800 million in the full fiscal year.
We are currently maintaining our long-term Neutral recommendation on United Continental. For the short term (1-3 months), the stock retains a Zacks #3 (Hold) Rank.