United Reaches 5-Year High After $2 Billion Cost-Cut Plan
United Continental Holdings Inc. (UAL) climbed to the highest price since 2008 after the world’s biggest airline said it would cut $2 billion in annual spending and boost profit.
Half the savings will come from a 7 percent reduction in fuel expense as it flies newer, more efficient planes such as Boeing Co.’s (BA) 787 Dreamliner and existing aircraft are equipped with winglets to boost conservation. At a presentation in New York today, the Chicago-based carrier also said it expects to boost fee revenue by $700 million a year.
United combined with Continental Airlines in 2010 and has struggled since then to control costs that are growing faster for each seat flown a mile than revenue on the same basis. Profit growth trailed competitors in the last quarter and the carrier is counting on an overhaul of its fleet designed to swap gas-guzzlers with more fuel-efficient models.
“We are very positive on these stated goals, but where UAL has run into problems over the past two years is in execution of its stated plans,” James Corridore, an analyst with Standard & Poor’s Capital IQ, wrote in a note to clients today. “We would like to see some traction on these plans.”
United rose 3.9 percent to $37.80 at 4 p.m. in New York. It was the highest close since Feb. 13, 2008, according to data compiled by Bloomberg that reflect the merger with Continental.
United’s plan, which includes an unspecified return of cash to shareholders in 2015, was outlined after a series of operational issues snarled flights and drove away some customers and four public computer disruptions since the airline switched to a new reservation system in March 2012.
“We’re very confident we can deliver,” Chief Executive Officer Jeff Smisek said today at the presentation, the first as a combined airline. “We believe that we can deliver for you, our investors, multiples of our current earnings.”
The plan calls for as much as a 20 percent increase on a per-mile-flown basis in employee productivity, which has fallen each year since the merger. The changes as a whole will raise pretax earnings in a range of 2 percent to 4 percent over the next four years, the airline said.
United, which said it will pay as much as $13 billion for fuel in 2013, will take delivery of 25 new planes annually over the next four years to replace older models and smaller regional aircraft.
The new planes and other measures are projected to lower maintenance costs by $100 million annually, while another $500 million in potential gains is anticipated from boosting employee productivity. The company also sees $150 million in potential savings from sourcing and $100 million by shifting distribution channels by which it sells fares, according to the presentation.
“The plan we’ve laid out today will allow us to grow our earnings by delivering on cost reductions and revenue initiatives, and will remove a lot of risk in the business,” Chief Financial Officer John Rainey said. Achieving those targets “will allow us to get to the point sometime in 2015 that we can begin returning cash to shareholders.”
United will shift use of some of its largest planes, as well as cancel flights between Seattle and Tokyo, and Tokyo and Bangkok. A smaller plane will be used for flights between Tokyo and Seoul and a second daily Houston-Tokyo flight will be added. The carrier will also put Dreamliners into new markets.
The airline said it would generate $3.5 billion in ancillary revenue by 2017 through new purchase options for customers and improved pricing on existing products. It also will introduce a redesigned website that will be unveiled in phases over the next year.
United’s third-quarter pretax margin of 5.8 percent trailed the 11.5 percent at Delta Air Lines Inc., 9.5 percent at US Airways Group Inc. (LCC) and 9.2 percent at Southwest Airlines Co.
In October, Smisek said the carrier had addressed maintenance issues with its biggest planes that resulted in them being placed on less-than optimal routes. Those changes are expected to create a $40 million annual benefit, the airline said. United also has resolved a revenue management system error that caused it to sell too many low fares for too long.
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