United Air jumps after boosting profit outlook, bucking rivals

[DALLAS] United Continental Holdings Inc jumped to almost a six-month high after boosting its profit outlook, bucking cuts by rivals and signaling that a strategic overhaul is helping it manage just fine despite higher fuel bills.

Adjusted earnings will be as much as US$8.75 a share this year, 25 US cents higher than the previous forecast, United said in an earnings statement after the close of regular trading Tuesday. Delta Air Lines Inc and American Airlines Group Inc have both pared their profit projections, citing cost pressures from pricier jet fuel.

United's rosier view suggests that it's gaining financial traction from efforts to bolster flights at its hubs, improve the computer system for pricing airfares and install plusher business-class seats. The No 3 US airline also trimmed its plans for expanding flights and seats this year, taking a half-step back from an aggressive growth plan that spooked investors when it was announced in January.

"For the first time in a long time, we're struggling to find things to complain about, despite our preference for the curmudgeonly," JPMorgan Chase & Co analyst Jamie Baker wrote in a client note. The airline's outlook "is likely to satiate even the most demanding of bulls."

The shares surged 4.8 per cent to US$76.08 at 9.35am in New York after reaching US$76.49, the highest intraday since January 23 and sending other airline stocks climbing. United gained 7.7 per cent this year through Tuesday, the only increase on a Standard & Poor's index of five major US carriers.

United has also sought to improve its operations to reduce flight delays and cancellations, which helps to lure more corporate business. The carrier said its on-time departure rate in the April-June period was the best second-quarter performance since its 2010 merger.

Adjusted earnings rose to US$3.23 a share for the quarter, topping the US$3.06 average of analyst estimates compiled by Bloomberg. Sales climbed 7.7 per cent to US$10.8 billion.

Revenue for each seat flown a mile increased 3 per cent, the Chicago-based carrier said, at the upper end of its prediction of 1 per cent to 3 per cent. The figure, known as unit revenue, is closely followed by investors as a proxy for pricing power. For the third quarter, United expects the measure to climb 4 per cent to 6 per cent.

The report suggests that United is enjoying firmer pricing than its rivals, especially on international itineraries where fares have been stronger than at home, said Susan Donofrio, an analyst at Macquarie Group Ltd. Routes to foreign destinations accounted for more than 49 per cent of United's capacity last year, compared with 39 per cent for American and 38 per cent for Delta, according to Macquarie.

"Their pricing does look pretty solid," she said.

For the year as a whole, United forecast adjusted earnings of US$7.25 to US$8.75 a share. Analysts had predicted US$7.73.

United's average fuel cost jumped 39 per cent in the second quarter from a year earlier to US$2.26 a gallon, and its jet-kerosene bill rose by more than US$700 million. Spot prices for jet fuel in New York harbour were US$2.09 a gallon on Tuesday, 43 per cent higher than a year ago. In the third quarter, United expects to pay as much as US$2.32 a gallon.

Last week, Delta lowered its 2018 profit range by US$1 a share because of higher fuel bills. That followed a cut by American in April. American further spooked investors on July 11 with a financial outlook suggesting that airfares are weaker than expected this summer.

United's quarterly results included a special charge of US$105 million to reflect a lower value for United's Brazilian routes following the May ratification of an Open Skies agreement between the country and the US Airlines now have unrestricted access between the nations.

BLOOMBERG