UAL results surprise the markets as it dumps all 50 seat aircraft and 10 787s, retrofits older aircraft and leases-in its new domestic narrow body fleet

Dino D'Amore
By Dino D'Amore April 23, 2015 16:51

UAL results surprise the markets as it dumps all 50 seat aircraft and 10 787s, retrofits older aircraft and leases-in its new domestic narrow body fleet

United Continental has surprised many today with what look to be the best set of Q1 results of any major North American airline, in the process taking the heat off of the CEO.

Announced today UAL will complete the removal of more than 130 50-seat aircraft from its regional schedule by the end of 2015. All additional 50-seat aircraft will go in 2016 and beyond as the same come off lease.

UAL will drop its order for ten 787s, exchanging the same for 777-300ERs for delivery beginning in 2016. This move will assist UAL in increasing capacity at speed.
The airline announced that it will extend the life of 11 additional 767-300ER aircraft – so now all 21 767-300ERs in the fleet will be retrofitted with winglets, interior modifications and tech upgrades. UAL will also reconfigure and transition 10 777-200s currently used in international markets into the domestic network, and position a number of its trans-Atlantic 757-200s into the domestic and Latin markets, with the extension of the 767-300ER aircraft.

UAL announced that it will also acquire additional used narrowbody aircraft. The company is in final negotiations regarding the lease of 10 to 20 used narrowbody aircraft for delivery over the next few years. In addition, the company plans to continue to seek other opportunities to acquire used aircraft to meet its needs as market conditions allow. None of this will alter UAL’s current gross annual capital expenditure guidance of $2.7 billion to $2.9 billion over the next three to four years.

Record Profit

United today announced record first-quarter profit of $582m (Excluding Special Items of $74m; $508m) equating to a 17.1% return on invested capital for the 12 months ending March 31, 2015 and close to $1bn up on last year. Consolidated passenger revenue per available seat mile (PRASM) increased 0.4% for first-quarter 2015 year on year. First-quarter 2015 consolidated unit costs (CASM), excluding special charges, third-party business expenses, fuel and profit sharing, decreased 1.5% year-on-year on a consolidated capacity increase of 0.1%. First-quarter 2015 CASM, including those items, decreased 13.1% year-on-year. In the quarter, UAL prepaid approximately $120m of debt and announced its intention, in the second quarter, to prepay $601m of its 6% notes due 2026 and 2028. The airline also returned approximately $200 million to shareholders as part of its previously announced $1 billion share buyback program.

UAL now expects second quarter pre-tax margin to be between 12 and 14%, excluding special items.

For the first quarter of 2015, total revenue was $8.6 billion, down 1% year-on-year. First-quarter consolidated passenger revenue increased 0.5% to $7.4 billion, compared to the same period in 2014. Ancillary revenue per passenger in the first quarter increased 8.6% year-on-year to more than $23 per passenger. First-quarter cargo revenue grew by a healthy margin of 15.8% year-on-year to $242 million. Other revenue in the first quarter decreased 14.2% year on year, mostly due to the reduction in sales of fuel to a third party.

Consolidated revenue passenger miles increased 0.1% and consolidated available seat miles increased 0.1% year-on-year for the first quarter, resulting in a first-quarter consolidated load factor of 81.1% – An impressive fleet management/demand alignment.

First-quarter 2015 consolidated PRASM increased 0.4% and consolidated yield increased 0.4% compared to the first quarter of 2014.

As with the other US majors, yield on Pacific routes is dropping (7.9%) and revenue per passenger is also falling (2.5%) and we can expect some action to be taken following the Delta lead perhaps. But should US airlines be pulling back on Pacific routes in the face of increased competition because as they do they will no doubt strengthen the remaining airlines connecting the USA across the Pacific. UAL has in fact increased capacity on Pacific routes by 5.3% year on year and looks to be one airline that will stick it out.

The real winning areas for UAL have been a 9.4% increase in passenger revenue on Latin American flights and areas of cost reduction. First-quarter consolidated CASM, excluding special charges, third-party business expense, fuel and profit sharing, decreased 1.5% compared to the first quarter of 2014.  The improved cost performance was driven by the better-than-expected performance from the company’s Project Quality efficiency program and the strong US dollar. First-quarter consolidated CASM including those items decreased 13.1%. First-quarter total operating expenses, excluding special charges, decreased $1.19 billion, or 13.2%, year-on-year. Including special charges, total operating expenses decreased $1.18 billion, or 13.0%, in the first quarter versus the same period in 2014.

In the first quarter, UAL generated over $1 billion in free cash flow, and ended the quarter with $7.0 billion in unrestricted liquidity, including $1.35 billion of undrawn commitments under its revolving credit facility. During the first quarter, the company had gross capital expenditures of $794 million, excluding fully reimbursable projects. The company contributed approximately $180 million to its pension plans and made debt and capital lease principal payments of $320 million in the first quarter, including approximately $120 million of prepayments. UAL also announced its intention to prepay the remaining $303 million of 6 percent notes due 2026 on April 1, 2015 and to prepay $298 million of 6 percent notes due 2028 on May 1, 2015.

As part of UAL’s $1 billion share buyback program, the company spent approximately $200 million in share repurchases in the first quarter. Through the first quarter, UAL has returned a total of approximately $520 million to shareholders under the program.
For the 12 months ended March 31, 2015, the company’s return on invested capital was 17.1 percent.

Dino D'Amore
By Dino D'Amore April 23, 2015 16:51