United Redraws Growth Plan, Ranks a 'Hold'

Mar. 8.11 | About: United Continental (UAL)

United Continental Holdings Inc. (NYSE:UAL), the largest U.S. airline reported a pull-back on its capacity growth plans for 2011 due to escalating fuel prices.

Earlier this year, United Continental announced its guidance of 1% to 2% increase in consolidated capacity in 2011. However, in light of the steeply rising fuel prices, the company now expects to reduce capacity by approximately 1% in May and approximately 4% by September. Additionally, United Continental also plans to scrap unprofitable routes and less fuel-efficient aircraft from its fleet.

Given the current changes in capacity estimates, the company expects its fiscal 2011 capacity to remain flat with the 2010 level. It estimates 2011 international capacity to increase 2.5% to 3.5% while domestic capacity to decrease 1.5% to 2.5% on a year-over-year basis.

In recent times, rising fuel prices have surfaced as a major headwind to the airlines industry. Companies are struggling hard to deal with increasing costs by lowering capacity, hiking fares or both. Giant carriers such as American Airlines, subsidiary of AMR Corporation (AMR) has guided toward a 2.5% capacity growth in 2011, below the estimated 3.5% it issued earlier.

Domestic carrier, Southwest Airlines Co. (NYSE:LUV) has also joined the bandwagon of carriers raising airfare to keep pace with the rising fuel cost. Southwest Airlines reported a $10 price hike for a round trip representing the sixth fare rise so far in 2011. Southwest is likely to spend an additional $1.3 billion on fuel in 2011 compared to 2010, which is almost triple the net income of $459 million for 2010.

Southwest’s increasing airfare did not have much of an impact on passenger numbers as suggested by the company’s February traffic that grew 13% over February 2010. However, United Continental’s February 2011 traffic dipped 1.1% against an increase of 1.8% in February 2010.

Fuel prices have risen over 50% to approximately $3 per gallon. Given the unrest in the Middle East, oil prices have reached about $107 a barrel. This has also compelled low-cost airlines such as JetBlue Airways Corporation (NASDAQ:JBLU), AirTran Holdings Inc. (AAI) and Frontier Airlines to increase their ticket prices.

Given the current market scenario of increasing pricing pressure and capacity pullbacks, we currently maintain our long-term Neutral recommendation on United Continental with a Zacks #3 Rank (Hold).