United sets $3.1 billion plan to close profit gap
Chicago-based United Continental Holdings says it will find $3.1 billion in savings and extra revenue by 2018 as it attempts to close a persistent profit gap with competing airlines.
The carrier's plan calls for sales gains of $1.5 billion by adding new fare levels, increasing the number of higher-priced seats and stepping-up management of ticket prices, Chief Executive Officer Oscar Munoz said Tuesday in a conference call with analysts and investors. Cost cuts and operational improvements will save or generate another $1.6 billion, the Chicago-based carrier said in a statement.
Munoz, who took over as CEO in September, offered new insight into how he intends to boost profit to the levels enjoyed by American Airlines and Delta Air Lines. United for several years has been the slowpoke of the airline industry. He also offered shareholders good news for the short term, saying that a key gauge of passenger revenue could fall less than previously expected in the second quarter.
"They've been waiting to hear what the strategic direction is under the new CEO," said Jack Atkins, an analyst at Stephens Inc. "To have two very important boxes checked this morning, it's not surprising investors are happy."
The carrier's shares had dropped 24 percent this year through Monday as the airline industry grappled with a rebound in fuel prices and declines in passenger revenue for each seat flown a mile, also known as unit revenue.
Unit revenue is expected to decline 6.5 percent to 7.5 percent this quarter, United said, compared with an earlier forecast for a drop of as much as 8.5 percent. Average fares per mile have beaten projections on routes across the Atlantic and in Latin America, Munoz said.
The carrier said it would seek sales gains by adding an entry-level fare, expanding its offerings for extra legroom and selling more premium-cabin seats. It set a goal of increasing such purchases to between $16 and $17 a passenger by 2018 from $10.94 last year.
United will seek additional gains through changes to its frequent-flier program and revenue-management system, in which it calculates how to maximize profits by adjusting seat prices. The airline also intends to cut costs and boost efficiency by increasing the size of its planes and moving away from inefficient 50-seat jets.
"We know we need to re-earn your trust," Munoz told investors on the call. "And that will only come from proof points, not just promises."
The details announced Tuesday had none of the major structural changes called for by some analysts in recent months, such as selling assets or shrinking some weaker hubs.
Munoz did, however, say that United will look at all of its hubs and routes to see what role they play and if they're meeting goals. United plans to add seats or flights to its best-performing hubs, and slow growth at its weaker ones, he said.
The airline may be overstating the potential benefits of the initiatives and the plan doesn't include the impact of new labor contracts, which may increase costs by $900 million, said Jamie Baker, an analyst at JPMorgan Chase.
Still, the company appeared to be setting realistic goals, rather than suggesting it will somehow beat Delta's profit margins. United's operating profit was 13.6 percent of sales last year, compared with 19.2 percent for Delta and 15.1 percent at American.
"From this perspective, we are relieved that United is not implying Delta-trouncing margins any time soon, but rather a substantive (and welcome) narrowing of its margin deficit," Baker wrote in a note to clients.
United's share of seats in its hubs fell to 31 percent last year from 36 percent in 2010, the year its parent merged with Continental Airlines, the company said in a separate regulatory filing. United also has lost an unspecified number of premium customers, such as frequent business travelers, it said.
The airline will restore seat capacity in its best hubs to win back market share while keeping total capacity growth in line with demand, Munoz said. It also is trying to reduce the number of delayed and canceled flights. Reliability has been the chief complaint of business travelers, he said.