The largest U.S. airline United Continental Holdings Inc. (UAL) expects unit revenue (passenger revenue per seat mile) to grow 9.5–10.5% in the third quarter despite domestic capacity cuts.
Consolidated capacity is expected to dip 0.8% in the quarter. The 1.9% reduction in domestic flights will be partially offset by the 0.6% uptick in international ones.
Consolidated capacity fell 1.6% year over year in August compared with the 0.2% rise in July. The decline was due to the cancellation of several flights at Newark Liberty International Airport, John F. Kennedy International Airport and LaGuardia Airport in the New York hub. The northeastern region was affected by hurricane Irene that hurt United Continental’s revenue by $40 million last month.
Though escalating fuel prices remains a headwind, United Continental is well positioned to combat ensuing losses with fare hikes and capacity cuts. Increased ticket prices have so far been well adopted by the customers.
Furthermore, United Continental hedges its fuel position that restricts its losses and provides increased profitability. For the remainder of fiscal 2011, United Continental has hedged 51% of its expected consolidated fuel consumption using a combination of calls, swaps and collars.
To increase profitability further, United Continental will unveil a new loyalty program –– Mileage Plus –– following the full integration of United and Continental in the first quarter of 2012.
Further, the company is consistently expanding on-board products and services in both its domestic and international fleet. United Continental is in process of re-branding the fleet, offering Wi-fi through DirecTV and reconfiguring its international aircraft with new flat-bed seats in first and business classes. The fleet will be equipped with winglets and the new Boeing Co. (BA) Sky Interior.
We are recommending our long-term Neutral rating on United Continental. The stock retains a Zacks #3 (Hold) Rank for the short term.