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Abu Dhabi, UAETuesday 20 November 2018

United Continental boosts outlook as profits rise

United is gaining pricing power in what industry executives have called the strongest travel market since before the global financial crisis

United is on the right flight path, analysts say. AP
United is on the right flight path, analysts say. AP

United Continental boosted its 2018 profit outlook for the third time this year, overcoming higher oil prices as strong travel demand buoys a financial turnaround at the third-biggest US airline.

Earnings will climb to at least $8 a share this year, United said, after previously predicting as little as $7.25. The carrier improved its outlook despite an increase in jet-fuel prices of more than 30 per cent over the past year.

United is gaining pricing power in what industry executives have called the strongest travel market since before the global financial crisis a decade ago. Robust demand has helped United win over sceptical investors who were initially unnerved by the company’s plan to beef up flights at its major hubs. United also is enhancing premium offerings and wooing budget travellers with “basic economy” fares that offer cheaper prices with fewer frills.

“United has done a great job of managing to improved revenue results,” Helane Becker, an analyst at Cowen & Co, said in a note to investors on Wednesday.

The shares climbed early Wednesday, carrying other airlines higher. United advanced 6 per cent to $88.50 before the start of regular trading in New York. The stock gained 24 per cent this year through Tuesday’s close, the only increase on a Standard & Poor’s index of nine US airlines.

Storm Impact

Adjusted third-quarter earnings rose to $3.06 a share, compared with the $3.10 average of analyst estimates compiled by Bloomberg. Tropical storms during the quarter reduced earnings by 7 cents a share. Sales increased 11 per cent to $11 billion, compared with the $10.9bn expected by Wall Street.

Faced with a fuel bill that rose 42 per cent in the third quarter, an increase of about $763 million, United said it passed along all of the added cost to passengers. Last week, Delta Air Lines said its customers were covering 85 per cent of the burden last quarter.

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For the full year, United said it would push about 90 per cent of the extra expense of about $2.5bn onto travellers. Pricier fuel has also curtailed walk-up domestic tickets of less than $100, which airline executives term “junk” fares.

Earnings this year will be between $8 and $8.75 a share, United said. At the midpoint, that represented an increase of 37.5 cents from the previous forecast of $7.25 to $8.75.

In January, United announced an ambitious three-year expansion program to regain what it considers its “natural share” of travellers at its three mid-continent hubs, in Chicago, Denver and Houston. With United planning to increase flights and seats by as much as 6 per cent a year, investors worried that so much growth would easily outstrip demand and undermine industry earnings.

Instead, fares have improved amid robust travel and slight cutbacks in 2018 expansion plans at United and other carriers.

In the fourth quarter, revenue from each seat flown a mile, a measure of an airline’s ability to raise fares, will climb 3 per cent to 5 per cent, United said, matching a Delta forecast from last week. That would extend United’s gains in the closely watched yardstick known as unit revenue, which climbed 6.1 per cent at the Chicago-based carrier in the third quarter.

If the revenue momentum continues into 2019, both Delta and United would be in a position to expand profit margins, potentially bolstering shares. The world’s largest carrier, American Airlines, reports results October 25.

United expects to expand seating capacity as much as 6 per cent in the fourth quarter, giving it a 2018 capacity increase of 4.9 per cent. With positive results thus far, United plans to keep up growth in 2019 with new flying from its hubs into smaller markets. It’s also withdrawing nonstop flights in some particularly competitive markets, such as Los Angeles to Dallas.

Next year, capacity will rise 4 per cent to 6 per cent, United has said. That’s expected to outpace growth at American, Delta and Southwest. By 2020, the company has told investors to expect earnings of $11 to $13 a share.