The largest U.S. airline United Continental Holdings Inc. (UAL) reported first quarter 2011 adjusted loss of 41 cents per share outpacing the Zacks Consensus Estimate by 4 cents. Adjusted earnings showed a substantial 29.3% increase from a loss of 58 cents in the year-ago quarter. Despite higher fuel prices and capacity cuts, earnings improved on increased fares and extra fees.
Adjusted earnings exclude $77 million of special items pertaining to merger-related costs and other one-time charges.
Revenue
Total revenue climbed 10.8% year over year to $8.2 billion in the reported quarter and was ahead of the Zacks Consensus Estimate of $8.195 billion driven by higher ticket prices and continued growth in ancillary revenue. On an annualized basis, Passenger, Cargo and Other revenues showed increases of 11.5%, 9.3% and 5.2%, respectively.
Airlines traffic, measured in revenue passenger miles, dropped 1% year over year while capacity or available seat miles grew 1.4%. Traffic slowed slightly in the first quarter due to lower demand caused by the March 11 disaster in Japan. Load factor (percentage of seats filled with passengers) declined 200 basis points year over year to 78%.
Operating Expenses
Total operating expenses, excluding special items, increased 10.2% year over year in the reported quarter. Steeper expenses were largely due to a 34.5% year-over-year rise in fuel price, excluding the impact of hedges.
Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, upped 2.2% year over year. CASM, including fuel and special items, grew 9.6% from the year-ago quarter.
Liquidity
The company ended the first quarter with cash equivalents including short-term investments of $8.9 billion. United Continental generated operating cash flow of approximately $1 billion and spent approximately $268 million during the reported quarter.
Outlook
In order to counter rising fuel prices, United Continental Holdings plans to cut its capacityapproximately by 1% in May and 4% in September. Further, in a move to control the situation in Japan, United Continental is expected to slash 14% of its Japanese capacity in May. For fiscal 2011, the company expects capacity to be flat year over year.
Our Analysis
Despite the company’s healthy balance sheet, merger synergies as well as solid growth prospects, we believe reduced capacity will hurt United Continental’s profitability throughout the year. We remain concerned about the airline sector as a whole due to the escalating fuel prices and disaster in Japan that is expected tostall the ongoing recovery of the U.S. airlines.
United Continental is cutting its capacity more than its rivals Delta Air Lines Inc. (DAL) and American Airlines, a wholly owned subsidiary of AMR Corporation (AMR), to combat the difficult situation arising from the Japan crisis as well as high fuel prices. Further, high unionization, competitive threats and integration of Continental Airlines with United might pose major risks to the company’s profitability going forward.
Hence, we are currently maintaining our long-term Underperform recommendation on United Continental, supported by the Zacks # 4 (Sell) Rank.
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