MIAMI — Chicago-based United Airlines reported a net profit of $298 million, or $0.78 per diluted share, in the fourth quarter 2013 excluding special items earlier today. The reasonably strong fourth quarter fed into the carrier reporting a net profit of $1.08 billion for calendar year 2013 excluding special items ($2.84/share), up 84% year-over-year (YOY) from $589 million earned in 2012.

The profit was driven by increases in operating revenue and flat expenses. Overall operating revenues increased 3.0% YOY to $38.27 billion. Mainline passenger revenues increased 0.7% YOY to $25.99 billion, while regional revenues saw a healthy uptick of 5.1% to $7.12 billion. In a reversal of the strategy employed by rivals such as Delta Air Lines, United continues to lean heavily on its regional provider partners to provide connectivity throughout its route network. The biggest jump came from other operating revenues (such as the sale of frequent flyer miles to credit card partners), which jumped 20.4% YOY to $4.27 billion, in large part thanks to an agreement to sell jet fuel to a third party.

Consolidated (mainline and regional combined) passenger revenue per available seat mile (PRASM), which includes ancillary revenues such as checked baggage fess and change fees was up 3.1% for the year to 13.5 cents, while passenger yield increased 1.8% to 16.14 cents on 1.4% growth in capacity as measured by available seat miles. Both figures are in line with those reported by rival Delta Air Lines, but disappointing nonetheless, given that United’s PRASM is about 4.8% lower than that of Delta (meaning that it has a lower base, and thus easier YOY comparison).

However, after the challenges United faced with regards to PRASM growth in the third quarter of 2013 (which was robust for every other US carrier) thanks to self-reported mishandling of their demand forecast and thus their inventory allocation, the full year PRASM growth is certainly respectable. The relatively poor yield growth is a troubling sign however, as it lends credence to the idea that United is losing several of its high yield customers in the face of a resurgent American Airlines and its own customer service issues thanks to technological meltdowns and reliability challenges.

Region by Region Revenue Performance Broke Down as Follows:


Change in PRASM 4Q 2013 (%)

4Q 2012 RASM (cents)

4Q 2012 CASM (cents)

4Q 2012 Operating Margin (%)

4Q 2013 Projected Operating Margin (%)






(-9.8) to (-9.1)%






29.9 to 30.6%

Latin America





27.4 to 28.1%

The Pacific is a core United Airlines strength, and even with a slight decline in PRASM the carrier is still the market leader by a wide margin. The Atlantic business, as with all carriers, is affected by seasonality and the fourth quarter is perhaps the lowest season (depending on whether Easter falls in the first or second quarter). Conversely, Latin American performance continues to be a strong suit for United. Admittedly, the carrier is smaller than American or Delta to the region, but its hub in Houston generates an enormous amount of high yield origin and destination (O&D) traffic tied to the energy industry, which in turn drives huge margins.

These international figures ultimately hit at an important aspect of analyzing United. For all of the airline’s customer service challenges, reliability issues, and technological foibles, it still has a network that is unparalleled by its US carrier peers. And that network strength shows up most clearly right now in the international sphere, where the disruptions of 2012 and 2013 were of a lesser magnitude.

Turning to expenses, United’s total expenses were virtually flat YOY at $37.03 billion versus $37.113 billion in 2012. Fuel costs decreased a healthy 6.0%, down $793 million from 2012 to $12.34 billion in 2013, as the company paid an average of $3.13 per gallon, $3.12 if you include fuel hedges. Looking forward, United should continue to save money on fuel over the next few years thanks to its aggressive fleet turnover (substituting fuel efficient Boeing 737-900ERs for inefficient 757-200s, though the hedge book (roughly 31% for the next three years) does inject some risk. However, given the explosion in US oil production, oil prices are projected to, at worst, remain flat over the next four years, leaving United in a relatively strong position.

The savings on fuel were partially offset, however, by increases in salaries, which jumped 8.6% YOY from $7.94 billion to $8.6 billion. The increase was driven by a series of new labor contracts integrating the merged United and Continental workforces, though the carrier still needs to make additional progress on that front in 2014. The company also paid out $190 million in profit sharing, a huge 59.7% increase from the $119 million it doled out in 2012. Overall cost per available seat mile (CASM) was up 1.2% to 15.09 cents, while CASM exluding fuel increased an alarming 6.6% to 9.57 cents.

Turning to balance sheet and cash flow initiatives, United ended the year with $19.0 billion in total debt obligations after paying off roughly $2.3 billion worth of debt and capital lease obligations in 2013. United’s debt position, while not as strong as that of Delta, is extremely manageable, with total debt maturities between 2014-2017 of just $4.8 billion. United ended the year with $6.1 in unrestricted liquidity, and had gross capital expenditures of $760 million in the fourth quarter. United has not yet released its full books for the full year, but when they do, we will update this space with more in-depth analysis of the balance sheet and cash flow statements.

United’s return on invested capital (ROIC) for the full year hit 10%, finally matching the company’s stated target. However for the full year, United recorded an operating margin of just 3.3% versus the more than 9.0% at Delta and underperforming most of the industry. United still has not recovered from its disastrous reliability issues in 2012, and it has certainly lost many of the high value corporate customers who power legacy carrier profits in the United States.

Even as reliability has returned to the industry norm, new challenges have arisen in the form of a powerful new American Airlines with a bulked up network thanks to the US Airways merger, and network evolution and role expansion on the part of Southwest and JetBlue. Instead of trying to hold its position and leverage the strength of its network, United has instead focused on growing ancillary revenues as an offset (admittedly ancillary revenues grew 15% in the fourth quarter to $21 per passenger) to the tune of $700 million in growth per year through 2017.

Ancillary revenues have played an undeniable role in returning the US airline industry to profitability, but perhaps United could be a little more judicious in avoiding particular initiatives that anger high value frequent flyers.

Still, it’s important to keep a modicum of perspective on United’s performance. $1.08 billion is an extremely healthy profit by the historical standards of the US airline industry, and while it pales in comparison to Delta’s performance, keep in mind that Delta has been merged (with Northwest) for two years longer than United. At this point in the merger cycle, Delta’s net profit was just $769 million on $35.23 billion in revenue. United outperformed that standard in 2013.

4Q 2013 Passenger

Revenue vs.

4Q 2012

4Q 2012

Yield vs.
4Q 2012

Available Seat
Miles vs.
4Q 2012



















Latin America