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United Loses $489 Million in Q1 2014: Analysis

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United Loses $489 Million in Q1 2014: Analysis

United Loses $489 Million in Q1 2014: Analysis
April 24
13:15 2014

MIAMI — United Airlines lost $489 million, or $1.33 per diluted share in the first quarter. The quarter was worse than Q1 2013’s heavy loss of $358 million as the carrier continues to battle its own ballooning expenses in an effort to cut $2 billion from the budget by 2017.

United blamed its poor financial performance on severe winter weather, which wreaked havoc across the industry through January and February. Yet the weather only accounted for an estimated $200 million of the loss, which, when including special items, ballooned to $609 million down the tubes.

“This quarter’s financial performance is well below what we can and should achieve. We are taking the appropriate steps with our operations, network, service and product to deliver significantly better financial results,” said United CEO Jeff Smisek in a prepared statement.

Operating revenues decreased 0.3% year over year (YOY) to $8.69 billion, led by a 2.3% YOY drop in total consolidated—mainline and regional combined—passenger revenues. Cargo faltered as well, dropping 7.9% to $209 million. Other operating revenue jumped 18% YOY to $1.1 billion, thus stemming the total overall revenue decline. Consolidated passenger revenues showed a loss at virtually every turn. Overall passengers flown decreased 1.4% YOY, outpacing a decrease in available seat miles (ASM) by 0.3%. Passenger revenue per ASM and yields both declined 2.0% to 12.91 cents, and 15.92 cents respectively.

Turning to geography specific performance, United suffered poor revenue performance across the board. Domestic mainline performed the strongest, with revenue falling just 0.2% to $2.9 billion, and PRASM rising 1.4% YOY on a 1.0% decline in capacity. Atlantic destinations, which are typically a weak spot during the first quarter, saw revenue decline 1.9% to $1.16 billion and PRASM fall sharply by 3.4% YOY on 1.5% capacity growth. Latin America, typically a strong Q1 performer, saw revenue 2.6% against 2013 to $683 million, and more alarmingly, PRASM decline 1.7% YOY. Pacific operations took the worst beating, due in large part to ongoing currency issues abroad. The region saw revenue decline 5.0% YOY to $1.08 billion, and PRASM collapse precipitously by 6.3%. International operations as whole, typically United’s strongest profitability contributor, posted an average PRASM decrease of 4.1% and a 2.3% decline in total revenue to $2.93 million. Regional revenues declined 5.2% to $1.54 million with PRASM falling 3.5% YOY on a 1.8% drop in capacity.

The region specific revenue challenges continue to be a significant problem for United. Domestic mainline revenue stayed steady YOY, which is a reflection of the raw strength of United’s powerful network. The decline in Atlantic PRASM is unsurprising given that the European economy continues to weaken, though it is disappointing that United added capacity in the region despite economic weakness and the shift of Easter to Q2. As for Asia-Pacific, those results were to be expected and are in line with the figures reported by Delta in terms of Pacific performance. United has the deepest and most varied Asian network of any carrier, so it makes sense that they have been hit the hardest by the currency declines that are spreading across Asia thanks in parts to the actions of the US Federal Reserve Bank. Latin American performance was relatively poor, though that could reflect persistent economic weakness in Brazil and Argentina. Latin performance should flip back up in Q2 and Q3 as Brazilian traffic is set for a boost from the World Cup.

Still, it’s important to keep in mind that United’s Latin hub in Houston is the weakest of the big four (American at Miami and Dallas/Fort Worth and Delta at Atlanta being the other three), lacking the O&D power of Miami, and the overall critical mass of connectivity at Dallas/Fort Worth or Atlanta. And the biggest strength for United in Latin America, namely Houston’s oil ties with Brazil and Venezuela, was muted by economic weakness in the former, and downright currency insanity in the latter. Regional revenue performance was abysmal, and were one to dig further into the data, it would not be surprising to find that the revenue decline for regional traffic was heavily concentrated on 50-seat regional jets (RJs).

Given United’s use of 50-seat regional jets on myriad unsuitable routes, it is safe to conclude that United has an RJ problem. And more generally, United has a revenue problem. To be clear, this doesn’t mean that United should abandon its initiative to cut $2 billion in costs. But it should become more aggressive in pursuing revenue growth opportunities. And a good place to start would be re-deploying larger RJs on longer routes, and smaller RJs on shorter ones.

Consolidated operating expenses grew to $9.04 billion, a 0.7% increase over 2013. The relatively small $60 million increase reflects a few offsetting line items. Fuel expenses decreased 4.4% YOY to $2.92 billion, along with aircraft rent (down 6.7% to $224 million), and regional capacity purchases (down 4.9% to $559 million). The decreases on the balance sheet were offset by increases in labor costs (up 1.2% YOY to $2.15 billion), landing fees (up 15.1% to $572 million), and maintenance (up 4.6% to $458 million). Other operating, which includes technology and customer service expenses, jumped 13.6% to $1.38 billion from 2013’s $1.21 billion.

Overall, the increase in operating expenses drove up United’s operating loss to $349 million in Q1, for an operating margin of -4.0%. Compare that to Delta’s 7.0% or American’s 7.3%. That 11+ percentage point gap is enormously troubling to say the least. United’s cash flow performance, on the other hand was much more solid, with operating cash flow of $694 million against capital expenditures of $737 million for a free cash flow of – $43 million. Admittedly, negative free cash flow is never fantastic, but this performance portends well for upcoming quarters (one of few indicators that does). Because operating cash flow in particular includes cash earned from forward bookings, an uptick can be expected in Q2.

Overall, United’s financial performance was certainly disappointing. At the same time, it is important not to overreact to the poor performance. Keep in mind that even in years of record profits, United tends to lose money due to the characteristics of its network (more Atlantic than Latin America) during the first quarter. And this year’s results were exacerbated by winter weather and Asian currency weakness. This does not to excuse United’s poor performance or structural challenges. Still, we expect United to record a significant full year profit.

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A Global Review of Commercial Flight since 1994: the leading Commercial Aviation publication in North America and 35 nations worldwide. Based in Miami, Florida.

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