United Continental Doubles Estimate - Analyst Blog

United Continental Holdings Inc. (UAL), the largest U.S.airline, reported fourth quarter adjusted earnings of 44 cents per share, exactly twice the Zacks Consensus Estimate. Adjusted earnings showed a whopping increase from a loss of 60 cents in the year-ago quarter. Despite higher fuel prices, earnings improved on increased fares and traffic, and a revival in the airline industry.

Adjusted earnings exclude $485 million of special items related to merger-related costs and other one-time charges. Fiscal 2010 earnings were $4.30 per share compared with a loss of $3.89 per share in prior year.

After the merger of Continental Airlines with UAL Corp. on October 1, 2010, the company reported consolidated results of the two operating subsidiaries, United Airlines and Continental Airlines for the first time. The merger created theworld's largest airline, overtaking Delta Airlines (DAL), which acquired Northwest Airlines in 2008.

Revenue

Total revenue climbed 15% year over year to $8.43 billion in the fourth quarter and was ahead of the Zacks Consensus Estimate of $8.35 billion driven by higher ticket prices. On an annualized basis, Passenger revenue, Cargo and Other revenues showed increases of 15.8%, 13.6% and 8%, respectively.

Airlines traffic, measured in revenue passenger miles, climbed 4% year over year on the capacity or available seat miles growth of 3.8%. Load factor (percentage of seats filled with passengers) rose 100 basis points year over year to 82%.

Fiscal 2010 revenue was $34 billion, up 18.9% year over year on a marginal capacity increase of 1.1% as well as load factor increase of 190 bps.

Operating Expenses

Total operating expenses, excluding special items, increased 10.2% and 9.5% year over year in the fourth quarter and fiscal 2010, respectively. Steeper expenses were largely due to a respective 17.6% and 27% year over year rise in fuel price in the fourth quarter and fiscal 2010, excluding the impact of hedges.

In the fourth quarter, consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, upped 1.8% year over year. CASM, excluding special items, grew 6.1% from the year-ago quarter.

Liquidity

The company ended 2010 with cash equivalents including short-term investments of $8.7 billion. United Continental generated operating cash flow of approximately $106 million and spend approximately $257 million during the reported quarter.

Our Analysis

We believe the improving demand for air travel, revival in the airline industry, tight capacity, industry leading unit revenue growth, fleet right-sizing, network optimization, hedging strategy as well as the merger benefits from Continental Airlines bode well for United Continental's future growth.

The company is expected to generate net annual synergies of $1 to $1.2 billion by 2013, with $800 to $900 million in additional revenue and $200 to $300 million in cost savings. However, the time-taking integration of the two companies, competitive threats and unionized workforce might be the downside. Further, the rising fuel prices might stall the ongoing revival in the airline industry.

We are currently maintaining our long-term Neutral recommendation on United Continental, supported by the Zacks #3 Rank (Hold).

 
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