ANALYSIS: United revenue initiatives begin bearing fruit

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United Airlines is on track towards much needed revenue and cost improvements, its 2013 numbers show.

The Chicago-based carrier’s $1.25 billion operating profit comes on the back of a 3% increase to $38.3 billion in operating revenue and a 0.2% decrease to $37 billion in operating expenses.

These are significant improvements over 2012. Operating profit was $39 million while operating revenue grew only 0.1% on a 5.2% increase in operating expenses during the year.

During the first half of 2013, United focused on cost savings, including trimming its management and administrative headcount by 6% or about 600 employees, improving operational performance and reducing high staffing levels.

It accomplished these with Jim Compton, chief revenue officer of the airline, describing the gains in 2013 as “solid”, during an earnings call today.

United shifted its focus to revenue generating initiatives, including its demand forecasting software, further fleet optimisation and capacity adjustments over the Pacific, later in 2013.

However, while improvement was made on the revenue side, Compton says the gains will “accelerate” in the first half of 2014.

For example, major changes to United’s Pacific schedule do not begin until April when it will end its flights between Tokyo Narita and both Bangkok and Seattle/Tacoma while adding a second daily Houston Intercontinental-Tokyo flight.

“We laid the groundwork to be much more efficient in 2014 and beyond,” says John Rainey, chief financial officer of the carrier, on the 2013 results. “[However] we’re not yet even close to where we want to be.”

United will really begin to feel the initial benefits of its $2 billion, four-year cost savings initiative in 2014, says Rainey. These will include “meaningful progress” on productivity, maintenance and fuel consumption improvements.

The cost savings plan was first laid out at the airline’s investor day in November 2013.

Rainey anticipates a 1.5% improvement in fuel efficiency, equalling about $200 million in annual savings, in 2014. This will come from the replacement of older aircraft with new models and increased passenger capacity on some of United’s Airbus A320 and A319 aircraft.

The carrier anticipates deliveries of 36 mainline aircraft, including 30 Boeing 737-900ERs, four Boeing 787-8s and two 787-9s, in 2014. It plans to remove 37 Boeing 757-200s and one Boeing 767.

On the regional side, United plans to add 27 76-seat Embraer 175 aircraft, which will replace 34 up to 50-seat regional jets, according to its fleet plan released today. It will remove 25 Embraer 145s and all nine of the Embraer 135s in the United Express fleet.

GUIDANCE

Jeff Smisek, chairman, president and chief executive of United, calls the carrier’s progress in 2013 a “strong foundation on which to grow” on in 2014.

However, JP Morgan analyst Jamie Baker described the airline’s first quarter guidance as “inauspicious” in a research note today.

“United guidance suggests a challenging, consensus-missing start to 2014,” he writes.

The carrier anticipates flat to up 2% PRASM and a 3.5% to 4.5% increase in CASM excluding fuel and special items during the quarter, in an investor update released today. It expects to pay an average fuel price of $3.08 to $3.13 per gallon.

United took a net $60 million hit to revenues during the severe winter weather that plagued the Midwest and northeast earlier in January, executives say during the call.

Capacity is expected to increase by 0.3% to 1.3% in the first quarter, according to the update.

Compton says that the severe weather reduced its capacity guidance by 0.6 percentage points.

For 2014, United expects CASM excluding fuel and special items to increase by 1% to 2%.

Capacity will increase 1% to 2% during the year.

“This new capacity will be highly efficient,” says Compton.

United anticipates $2.9 billion to $3.1 billion in gross capital expenditures and $1.5 billion in debt and capital lease payments in 2014.