United Airlines once again fell short of its revenue targets, prompting a new three-pronged approach to boosting revenue going forward.
“We fell far short of what we can and should deliver,” says Jeff Smisek, chairman and chief executive of the Chicago-based carrier, during an earnings call today. “We are committed to delivering the full potential of United.”
Operating revenue was up 3.2% to $10.2 billion and operating expenses were up just 0.1% to $9.72 billion in the quarter. United generated an operating profit of $508 million and a net profit of $379 million after special items.
Passenger revenue per available seat mile (PRASM) was up just 2.7% to 13.71 cents during the period, which was on the low end of a 2.5% to 3.5% increase that United forecasted in September.
Smisek acknowledges that the third quarter was United’s best since its merger with Continental Airlines closed in 2010, saying that the airline met its cost and operational objectives.
“We ran a solid and competitive operation in the third quarter,” he says. “Our operations are now both stable and reliable.”
However, the airline’s margin underperformed other major US carriers by about 420bp, according to JP Morgan research today. This deterioration of its margin is comparable to the deterioration in the second quarter of 2012 after United moved to a single reservation system in March of that year, according to the lender.
“Whichever way you slice it, it appears that United is headed in the opposite direction from that of the industry aggregate,” writes JP Morgan.
United is addressing its demand forecasting, further optimising its fleet and addressing competitive pressure in the Pacific – specifically China – to boost revenue going forward, says Jim Compton, chief revenue officer at the carrier.
Demand forecasting resolution involves two calibrations to its demand management system, he says. These will increase the inventory available for close-in bookings, reduce the number of seats sold further out and limit the amount of overbooking.
The first calibration was implemented this month and the second will be implemented in November.
Optimisation includes the return of Boeing 747-400 aircraft to routes from Chicago O’Hare from March 2014, says Compton. This will generate about $40 million in additional revenue for the year.
All of United’s 747s were concentrated on at its San Francisco hub in order to reduce maintenance issues and increase operational reliability this past March.
The carrier remains committed to China, despite the competitive headwinds it experienced in the market during the third quarter, says Compton. He did not mention any concrete changes other than capacity adjustments but says “the region remains a critical asset for us”.
United’s passenger revenue per available seat mile (PRASM) for its Pacific network fell by 9.4% in the third quarter as industry capacity increased 20% between China and the USA, he says.
The third quarter is the just the latest quarter that United has underperformed management expectations. Smisek has made similar comments about being unsatisfied with the results since at least July 2012, citing operational issues last year and cost issues earlier this year.
“Are we satisfied with our financial results this quarter year-to-date? Absolutely not," he said in July.
Asked by analysts how management could guarantee that the revenue initiatives will work, Smisek says that incentive pay for the entire management team is tied to performance, pointing out that they all have “a lot on the line”.
He adds that his own stock ownership and purchases are examples of his long-term confidence in United.
Looking forward, United anticipates flat to down 2% PRASM in the fourth quarter. The US federal government shutdown in October shaved 1.5 percentage points off passenger unit revenue growth for the month, which the airline expects to increase by 2.5% to 3.5% as a result.
Capacity will increase 2.5% to 3.5% in the quarter ending in December, a result of comparisons to the period impacted by superstorm Sandy.
Full year capacity is expected to be down 1.2% to 1.4%.
Costs per available seat mile (CASM) excluding fuel, profit sharing and third party business expenses will increase by about 1% in the fourth quarter. This follows significant cost control initiatives that United began implementing in the first quarter.
“The increase in our non-fuel unit costs will be the high water mark for United,” says John Rainey, chief financial officer at the airline, during the call today. He adds that going forward growth will be less than inflation.
Full year CASM excluding fuel, profit sharing and third party business expenses is expected to increase 6% to 6.5% compared to 2012.
United will take delivery of six Boeing 737-900ER and one Boeing 787-8 aircraft in the quarter, says Rainey. It plans to remove 12 Boeing 757-200s - one less than it anticipated in July - during the same period.
The airline plans to have 693 mainline and 572 regional aircraft in its fleet at the end of December.