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United Airlines Rallies as Pricing-Power Gains Ease Growth Fears

Updated on
  • Carrier logs third straight quarterly increase in benchmark
  • Earnings exceed analysts’ estimates for first quarter

United Continental Holdings Inc. is pushing ahead with its aggressive growth plan as robust demand enables the airline to boost fares even as it expands the seat supply.

Revenue for each seat flown a mile, a proxy for pricing power, will rise 1 percent to 3 percent in the second quarter, the No. 3 U.S. carrier said in a statement Tuesday as it reported earnings. That would be the third straight increase in the benchmark, also known as unit revenue.

Uneven Trajectory

United's unit revenue has swung wildly since an early 2017 rebound

Source: United

Note: Q2 2018 estimate of up 1% to 3% plotted at midpoint

The pricing strength bolsters United’s bet that it can increase the number of seats and flights without sparking a fare war that would drag down profit. The carrier’s plan to boost seating capacity as much as 6 percent a year through 2020 sparked a stock selloff in January as investors anticipated depressed fares, especially in the Midwestern U.S. markets where United is focusing much of its growth.

“Investors were braced for unit revenues to be flat in the second quarter, but the positive 1 to 3 percent guidance assuaged fears” that rapid growth would hobble pricing power, said Andrew Davis, an analyst at T. Rowe Price Group, a major investor in U.S. airlines.

Investors should be relieved that United trimmed its plan for full-year capacity growth to no more than 5.5 percent, he said. The Chicago-based carrier said it would expand between 4 percent and 5 percent this quarter, following a 3.6 percent gain in the first three months of the year.

United also bumped up the low end of its full-year profit guidance, now forecasting between $7 and $8.50 a share. Its previous outlook was $6.50 to $8.50.

The shares advanced 2.8 percent to $69.20 in late New York trading. United slipped less than 1 percent this year through the close on Tuesday, compared with an 9 percent decline in a Standard and Poor’s index of five major U.S. carriers.

First-quarter adjusted earnings climbed to 50 cents a share, compared with the 48-cent average of analyst estimates compiled by Bloomberg. Sales increased 7.2 percent to $9 billion, matching analysts’ projections.

Unit revenue increased 2.7 percent, boosted by strong demand. Continued gains are vital as airlines seek to offset higher jet-fuel prices, which have climbed about 30 percent over the past year.

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