United Sees Rebound for Pricing Power on Last-Minute Airfaresby
Airline sees seating capacity growing 1%-2% this quarter
Shares gain after third-quarter profit beats estimates
United Continental Holdings Inc. said a benchmark financial gauge may have hit bottom in August, hinting at a rebound in the airline’s ability to charge more for flights.
The Chicago-based company is seeing stronger demand for expensive last-minute tickets as carriers trim plans to increase capacity, United President Scott Kirby said Tuesday. U.S. airlines are trying to reverse an 18-month slide in passenger revenue for each seat flown a mile, or unit revenue, as an expansion in flights and seats has prevented carriers from pushing through fare increases.
“It feels like an inflection point in domestic revenue,” Kirby said on a conference call with investors and analysts. “There probably was an inflection point in mid-August, as some of the pricing environment started to change at a number of airlines.”
Chief Executive Officer Oscar Munoz said the drop in unit revenue at United may be ending, though he stopped short of saying when it would start growing again. United expects the measurement, which is heavily influenced by fares, to fall 4 percent to 6 percent in the current quarter, marking an improvement over steeper declines earlier this year.
United shares rose as much as 3.7 percent, and were up 0.2 percent to $53.15 at 2:06 p.m. in New York. A Bloomberg index of airlines gained as much as 2.3 percent.
“Everything seems to be pointing to a positive trend in unit revenue,” Stephens Inc. analyst Jack Atkins said following the Tuesday morning analyst call. “Investors are cautiously optimistic about what they’re hearing out of all these airlines.”
United’s third-quarter adjusted earnings of $3.11 a share, beating the $3.06 average analysts’ estimates. Tuesday’s call was analysts’ first chance to hear from Kirby, a longtime American Airlines Group Inc. executive who joined United in late August.
Unit revenue at United is set to increase in Latin America in the fourth quarter, as capacity growth moderates and revenue in Brazil gains steam, the carrier said in a presentation Tuesday. The weakest region is Europe, which is hampered by the British vote to withdraw from the European Union and terrorist attacks.
United said it would increase seating capacity by 1 percent to 2 percent this quarter. Delta Air Lines Inc. last week announced plans to expand capacity by only 1 percent in 2017, less than half this year’s pace through September.
Costs for each seat flown a mile at United are forecast to climb 4.75 percent to 5.75 percent in the current quarter, excluding fuel and other items, the airline said in a statement Monday. The increase compares with no change in last year’s fourth quarter. The increasing costs are being driven by recent labor deals.
The higher costs may slow efforts to boost profit margins to the level enjoyed by rivals such as Delta, United Chief Financial Officer Andrew Levy said on a conference call with reporters Monday. Closing the gap with Delta and American has been a key goal of Munoz, who is expected to outline his plan to boost profit at an investor day in November.
“Investors may again question UAL’s ability to close the margin gap to peers,” Andrew Didora, an analyst at Bank of America Corp., said in a note to clients, referring to United’s ticker. He cited a “disappointing cost outlook.”
Munoz on Tuesday said recent labor deals that put pilots, flight attendants and mechanics under contract or nearing a contract vote were vital to improving customer service.
“I completely reject the notion we can’t have efficiency and productivity while also having customer service,” Munoz said. “And to that end in order to get customer service and that productivity, we have to invest in these folks.”