- Quick Take
- United improved its occupancy rates in the first quarter through capacity rationalization and this will grow its profits.
- However, higher non-fuel costs driven by new employee agreements and increased maintenance/repair costs will weigh on the carrier’s profits.
- Most importantly, United improved its on-time performance in the first quarter, and this will help it regain the passenger traffic it had lost to competitors last year.
United Airlines (NYSE:UAL) will announce its first quarter earnings Thursday, April 25. The carrier is coming off a forgettable 2012, when it posted a net loss of $723 million on integration issues, which severely impacted its on-time arrival performance. 
However, in the first quarter of 2013, United improved its operational performance with nearly 81% of its flights arriving on-time.  In addition, the carrier focused on rationalizing its flying capacity to better match the demand environment in its markets. This improved its average occupancy rates (the extent to which airplanes are filled), which will help grow its profits in the first quarter.
On the flip side, the carrier anticipates its first quarter non-fuel costs to rise significantly due to increased salaries resulting from new employment agreements, and additional expenses brought on by winter storm activity and grounding of 787s. This increase in non-fuel costs will impact profits.
We presently have a stock price estimate of $32 for United, just ahead of its current market price.
Improved On-Time Performance Will Help Regain Passenger Traffic
After losing significant passenger traffic to competitors in 2012 due to poor on-time performance, United focused on improving its on-time departure and arrival rates in the first quarter. The carrier was able to improve its on-time arrival rate to 81% in March, from a low of 63% in last July.  Looking ahead, this improvement in operational performance will help the carrier regain the passengers it had lost to competitors last year. (See United’s Reliability And Customer Experience Are Key To Better 2013 Results)
Better Capacity Rationalization Will Aid Profits
In addition, United reduced its flying capacity in all markets to reduce the number of empty seats on its planes. The carrier slashed maximum flying capacity from trans-Atlantic markets to Europe followed by the domestic U.S. markets and the international travel markets to Asia-Pacific and Latin America. Overall, United lowered its flying capacity by nearly 5% in the first quarter compared to the year ago period.  However, this lower capacity impacted the passenger traffic for the carrier, which will weigh on its top line.
On the bright side, this capacity rationalization improved the occupancy rates of the carrier by three points on a year-over-year basis, to 81.1% in the first quarter.  Improved occupancy rates will contribute to growth in the carrier’s profits. For full year 2013, United plans to lower its flying capacity by 0.75%-1.75% on a year-over-year basis. 
Increased Non-Fuel Costs Will Weigh On Profits
In February this year, United signed a joint collective bargaining agreement with IAM (International Association of Machinists), which represents over 28,000 United employees.  These new agreements are expected to raise the salary expenses of the carrier. In addition, United experienced higher than normal winter storm activity in some of its markets during the first quarter. This is expected to raise the carrier’s maintenance expenses. Certain crew related expenses resulting from the grounding of Boeing 787 will also impact profits of the carrier in the first quarter. In all, United forecasts its non-fuel expenses to rise by around 11%-12% in the first quarter, from their year ago levels. 
- Fourth quarter and full year 2012 earnings results – Form 8-K, January 24 2013, www.unitedcontinentalholdings.com
- United’s operational performance in March 2013, April 8 2013, www.unitedcontinentalholdings.com
- United’s JPMorgan Aviation, Transportation & Defense Presentation, March 4 2013, www.unitedcontinentalholdings.com
- United’s investor update released on March 28, March 28 2013, www.unitedcontinentalholdings.com
- United Airlines and the International Association of Machinists Reach Tentative Agreements, February 13 2013, www.unitedcontinentalholdings.com
Disclosure: No positions