MIAMI — United Airlines reported a second quarter net profit of $919 million excluding special items, or $2.34 per diluted share, up 51% year-over-year (YOY) from the same period in 2013. The beleaguered carrier also announced a $1.0 billion share repurchase program spread over the next three years, following in the footsteps of rivals Delta and American.

Total operating revenues grew 3.3% YOY to $10.33 billion, led by 3.6% growth in passenger revenues. Broken down by segment, mainline passenger revenue grew 4.7% YOY to $7.15 billion while regional passenger revenue declined 0.3% YOY to $1.83 billion. Cargo revenue decreased 1.7% YOY to $232 million, while other operating revenue, which includes things like credit card revenue from the sale of frequent flyer miles, rose 1.7% YOY to $1.12 billion despite a series of well publicized changes to United’s MileagePlus frequent flyer program that received significant negative press. Consolidated passenger revenue per available seat mile (PRASM) rose 3.7% YOY to 14.21 cents on a 0.1% decline in capacity as measured in available seat miles (ASMs) and a 3.0% increase in yields to 16.66 cents.

According to Chief Revenue Officer Jim Compton, United’s PRASM growth arose in part due to an optimized booking curve, which reduced early-cycle bookings in favor of last minute ones. During the second quarter, this drove 0.75 percentage points worth of PRASM growth, and is expected to deliver 1 percentage point of PRASM growth in the third quarter. United also accrued the benefits of restructuring premium cabin fares on domestic and short haul Latin American routes. The changes increased United’s paid premium load factor by 5 percentage points to 47%, driving 0.5 percentage points worth of PRASM.

On a related note, United’s revenues from paid upgrades to First Class rose 28% YOY. After several quarters of struggling with corporate customers due to its reliability challenges, revenue for large corporate accounts rose 3% YOY, despite a decrease in corporate revenue in April due to the shift of the Easter holiday.

Broken down by geography, domestic mainline revenue jumped 6.3% to $3.52 billion on a 6.8% increase in yields and a whopping 7.8% increase in PRASM. Trans-Atlantic operations, a particular strength of United’s thanks to its integrated hub at Newark, recovered with 2.8% YOY growth in passenger revenue to $1.71 billion and a 2.5% increase in PRASM. Pacific operating revenues declined slightly YOY to $1.19 billion with PRASM falling 2.6% YOY despite new routes and a stabilization of currency values in the region. Latin American revenues leapt 10.3% YOY to $731 million, with PRASM growing 4.4% YOY.

United continues to make progress in pivoting away from the dependence on 50-seat regional jets (RJs) that has been tied to many of its challenges in reliability and revenue generation. On the earnings call, United CFO John Rainey admitted that 50-seat RJs impacted revenues, noting that “When a 50-seat jet is placed side by side with a mainline jet, it’s an inferior product. And customers book away from that.” Today 8% of United’s capacity is represented by 50-seat RJs, but that will decrease to 5% by the end of 2015 thanks to the retirement of 130 50-seat RJ and RJ-equivalents (turboprops) replaced by 70 Embraer E175s (which seat 76 passengers and include a more competitive first class cabin). In terms of seat count, the retirements amount to the replacement of 6,800 seats worth of aircraft with 5,320 seats worth of aircraft, a 21.7% reduction.

We expect major frequency cuts and a few regional route eliminations from United over the next year and a half. And as Mr. Compton noted on the call, the E175s offer the kind of ancillary revenue generation opportunity (with First Class up-sells and Economy Plus) that have helped drive United’s revenue improvements.

Operating expenses rose 2.1% YOY to $9.42 billion, led primarily by an 11.8% increase in landing fees and facilities rental expense to $567 million and a 2.9% YOY increase in other operating expenses to $1.35 billion. Fuel expenses increased 1.1% YOY to $3.1 billion on 1.2% decrease in fuel consumption and a 2.3% increase in average fuel price per gallon. Labor expenses rose just 0.6% to $2.19 billion, though labor expenses will likely rise once United’s newly signed labor contracts matriculate during the second quarter. All other expense-line items declined year over year. Consolidated operating cost per ASM (CASM) rose 0.9% YOY excluding special charges to 14.64 cents, while excluding fuel, CASM was flat YOY to 9.39 cents. Mr. Rainey credited United’s Project Quality initiative, which by year-end is expected to deliver $300 million in non-fuel savings and $200 million in fuel ones.

United ended the second quarter with $6.8 billion in unrestricted liquidity, and is making steady progress towards a target of $10 billion in net debt. United repaid $333 million in debt during the quarter, and plans to pay down an additional $575 million over the remainder of the year. United also has $800 million in 6.75% secured notes that it plans to pre-pay at par in September. All of these initiatives are focused on reducing United’s non-aircraft debt. Mr. Rainey noted on the earnings call that United’s various debt initiatives have reduced United’s 2014 interest expenses by 30% versus 2010. However, unlike rival Delta, United plans to “… finance aircraft with debt. The efficiency in that [the aircraft debt] market is outstanding.”

Simultaneously, United’s executives hinted at a subtle shift in strategy during the earnings call towards Delta’s strategy for capital allocation. United mentioned several times on the call that it is considering used narrowbody purchases (after spending several quarters touting the millions of dollars in savings offered by a new 737-900ER over an existing 757-200), though market conditions (specifically the high residual prices for Boeing 737-800s) were noted as a potential limiting factor. United is also following in Delta’s footsteps by investing to increase the useful life of its (relatively) young widebody fleet. These initiatives are aimed at raising United’s free cash flow, an important metric for investors.

Delta is often the financial benchmark against which United and American are compared, and by that standard, United is still a laggard, with free cash flow of $650 million in the second quarter; less than half of Delta’s $1.54 billion figure for the same metric. Trailing 12-month return on invested capital totaled 10.3%, strong, but still behind Delta. And at 8.8%, United’s operating margin for the quarter lagged sharply behind those of Delta and American.

Despite not yet approaching the industry’s gold standard in financial performance, United has begun to take steps towards returning capital to shareholders, with $200 million in repurchases occurring over the next three months. United also pre-empted an increase of 1.5 million shares in its total pool by paying of $62 million in convertible notes. And the carrier is actively evaluating a dividend.

United’s strong financial performance implies that the breathless reports of United’s impending demise that emerged after weaker than expected first quarter results have been rather exaggerated. We cautioned readers at the time not to read too deeply into United’s first quarter performance given its network composition, and this quarter validated that mindset. Admittedly, United still lags behind Delta and American given where it is on the post-merger timeline and the intrinsic strength of its network. But after being battered by the press for the past three months, United’s financial results may have won the airline a temporary respite.

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