United records largest quarterly profit in the carriers’ history at $924 million
Chicago-based United Airlines earned $924 million in net income for Q3 2014, with earnings per share at $2.75 (excluding special items) ahead of analyst predications of $2.70.
That’s a heck of a lot better than last year’s results during the same operating period in Q3 2013, which amounted to $379 million in what is typically the strongest quarter for US airlines, and miles ahead of the $6 million profit UA earned in Q3 2012.
Measurably speaking, revenues increased while costs decreased, and consolidated PRASM increased 4.9% (compared to 2.7% last year) and yield rose 4.1% to 16.61 cents per mile, ahead of last year’s 1.9% growth where consolidated yield tallied to 15.96 cents per mile.
That being said, the numbers show that a small increase in revenues (3.3%) and a small decrease in costs (3.6%) can cause a large swing in terms of net income, which is why United’s net income and earnings per share more than doubled year-over-year.
Could that mean that United has finally turned a corner? Absolutely.
No doubt, the $2 billion cost reduction program has started to show its impact, and clearly gone are the days when United was blaming poor revenue performance on archaic practices formerly employed by Continental Airlines, its merger partner. Even though United carried fewer passengers this quarter than last year (down 2.1%), flew slightly emptier planes (load factors decreased by 0.4) and offered fewer available seat miles (down 0.9%), overall, the carrier’s revenue management team did a great job in helping to maintain, grow and optimize ticket and non-ticket sales.
The PRASM growth is particularly praiseworthy given United’s exposure to multiple headwinds in the global marketplace: conflict in the Middle East, Ukraine, Venezuela and business demand slowdown from the World Cup. On the earnings call, United Vice Chairman and Chief Revenue Officer Jim Compton did mention that the carriers’ shift in focus from Narita to mainland China and Taiwan was reaping benefits for United, indicating that those decisions are paying off already. On the domestic front, the removal of the Cleveland hub took place during Q3, and it is expected to save the company $60 million annually.
American and Delta also record strong numbers for Q3 2014, with their own respective gains and shortcomings
Comparatively, the other two major carriers did not outpace United in terms of PRASM and yield growth. Fort Worth-based American grew PRASM by a mere 1%, while seeing yields rise 2.6%. Atlanta-based Delta saw PRASMs rise 2.4% and yield rise 1.9%. Both American and Delta, however, grew capacity by 2% and 3%, respectively, compared to United’s 0.5% figure.
American’s net income came slightly ahead of United’s at 9,879 million, an 86.5% jump year-over-year. Operating revenues grew 4.4% while operating costs dropped 3.6%, although PRASMs were negatively impacted by the Venezuelan currency issue. American, by far, is the largest US carrier exposed to the currency devaluations in Venezuela, and has spooled down available seat miles to Caracas and Maracaibo, which it serves from its Miami hub.
Delta’s net income plummeted nearly 74% from $1,369 billion in Q3 2013 to $357 million in Q3 2014, as operating expenses rose 15.9% ahead of operating revenues, which grew only 6.6%.
Notably speaking, American and Delta both experienced growth in the Pacific region, with Delta adding two new routes from its Seattle hub to Hong Kong and Seoul, and American adding flights from Dallas/Ft. Worth to Hong Kong and Shanghai.
In the Pacific region, Delta earned $1,016 in revenue, representing a 2.8% decline year-over-year from Q3 2013, while unit revenues and yields both dropped 2.2% and 1.3%, respectively. American recorded stronger numbers in the Pacific during the same period, with 5% PRASM growth from 10.28 cents in Q3 2013 to 10.8 cents in Q3 2014. Of course, it is tough to pinpoint whether the stronger performance of American over Delta are directly attributed to the two new routes launched by each airline. Delta, for one, has a much larger exposure to the Pacific than American, especially the weaker Japanese markets. The question will be how such routes weather slower operating periods, such as Q4 2014 and Q1 2015.
United sees improvements in Asia-Pacific region, at least for now
United recorded 0.2% PRASM growth in Asia, while also recording 1.8% yield growth. Jim Compton mentioned that the carriers’ new routes to Chengdu and Taipei were performing “better than expected.” United also swapped out equipment on several of its long-haul routes between Australia and Asia, replacing 747-400s used on routes to Sydney and Melbourne from its Los Angeles and San Francisco hubs with 777s and the new 787-900 (between LAX and Melbourne) while also moving some of its 747-400s back to Chicago O’Hare to fly nonstop to Tokyo, Beijing and Shanghai.
Given the increased demand for China services during the summer months, the fleet swaps worked appropriately for the Chicago market; however, United executives did caution that United was facing 20% competitive capacity growth in markets such as Beijing and Shanghai moving into Q4 2014, which could potentially impact revenue performance on certain routes. United offers an older generation product, particularly in economy class, on its 747s than does Delta and American on their routes to Beijing and Shanghai.
That being said, consistency needs to be the core of United’s turnaround efforts
The largest complaints among United’s corporate base appears to revolve around consistency, and Smisek explained that, “three broad categories are being utilized for thinking about reinventing the busienss from an operations perspective: reducing variability, leveraging technology to improve the handling of irregular operations, and streamlining and simplifying operations.”
Aside from corporate jargon speak, Smisek elaborated on these points by using an example of spare parts distribution: by positioning the in stations where they are needed in the 3rd quarter, the airline saw flight cancellation rates related to spare-parts drop 20% year-over-year. This helped improve fleet utilization and revenue.
Of course, the flip side to that argument is that United faces far fewer operational challenges during the 3rd quarter due to weather, although its nice to know that the airline deployed and implemented a test trial during the summer months to have it ready for the winter. However, one could argue that United was tested with the Aurora fire in late September as well as various air traffic control delays due to an unusually high number of summer storms this year.
That being said, United appears to be comitted to utilizing technology solutions to help airport agents more quickly assist passengers during irregular operations, as well as mobile tools for roaming agents to help with re-routing passengers.
Still, the real challenge will revolve around United’s ability to withstand the tests of winter 2014/2015, and prove that its new technologies and toolsets at least offset some of the damaging PR the carrier faced last year when things went awry. Moreover, with more and more United stations being outsourced to contract employees, the carrier has to insure that practices are maintained and implemented in affected airports.
United will face headwinds in Q4 2014
Analysts remarked that while Q3 was solid for United, its PRASM guidance for Q4 2014 was “disappointing.” Exposure to excess supply in certain geographies, currency issues (Japan, Venezuela, Argentina) and competition will keep PRASMs flat during the final months of the Q4 operating period. Conversely, analysts were much more optimistic about American’s Q4 PRASM guidance, despite much higher exposure to the Venezuela crises and new competition at Love Field airport in American’s largest hub market.
So, even though analysts did not have gushing reports about Q4 guidance, at least United did something right this past quarter. Indeed, its fiscal performace is leaps and bounds ahead of where they were a mere few months ago, given its “uninspiring” track record, quoted one analyst. But, the improvement across all sectors still has mixed results. Maintaining that unity is United’s largest challenge.