Updated with additional comments from Jeff Smisek
United Airlines anticipates only a 1% to 3% increase in passenger unit revenue in the second quarter, trailing the increases expected at other major US carriers.
While executives of the Chicago-based carrier do not offer a definitive reason for its lagging numbers, chief revenue officer Jim Compton says that they are “disappointed” with the rate of unit revenue growth but that they are confident in their initiatives to increase that rate.
Initiatives include recalibrating the revenue management system, adjusting the times of flight banks at United’s hubs at Denver International and Houston Intercontinental airports to improve flows, more dynamic pricing of premium seats and better matching aircraft to demand close to departure, he says during an earnings call today.
“We expect to close the gap in RASM performance,” he says in response to analyst questions. “We will close it… over the quarters and years to come.”
Analysts remain sceptical.
“United’s PRASM underperformance in this period is particularly troublesome as revenue management initiatives put in place last year should have shown traction in this guide,” says Hunter Keay, an analyst at Wolfe Research, in a report today. “We remain concerned that United is facing an increasing structural disadvantage that may continue to widen as Delta and American grow stronger.”
Delta Air Lines anticipates an at least 5% increase in passenger revenue per available seat mile (PRASM) in the second quarter while American Airlines sees strong demand “across all geographies”.
Jeff Smisek, chairman, president and chief executive of United, does not think the airline has a "fundamental structural problem". He acknowledges its lagging revenue numbers but attributes them to continued inefficiency in its operations, for example parallel systems leftover from its merger with Continental Airlines in 2010, and its still lagging customer service performance.
"I don't think we have structural problems," he says. "I think we've identified all the areas where we need to improve. We have very good, very disciplined, very rigorous plans to attack each of those areas and I am very confident that we will."
PRASM fell 2% to 12.91 cents at United in the first quarter. Compton says that the decline was due partly to severe weather-related flight cancellations and the late Easter holiday.
United does expect roughly 8% growth in ancillary revenues to about $2 billion in 2014, says Compton. These include the sale of its extra legroom seats economy plus and baggage fees.
The carrier’s mainline advance bookings for the next six weeks are down 2.9 percentage points for domestic and down 0.2 points for international, according to an investor update today.
Unit cost growth is a bright spot for United. Costs per available seat mile (CASM) excluding fuel, special charges, profit sharing and third-party expenses grew only 3.1% to 10.28 cents in the first quarter – an eight-percentage point improvement compared to the increase a year ago.
“I am pleased with our cost performance in the first quarter,” says Smisek.
United reduced its procurement costs by $20 million and improved productivity by 1.6% in the first quarter under its $2 billion, five-year cost savings programme, says chief financial officer John Rainey.
Unit costs remain ahead of its peers, despite the savings. United was about half a cent higher than both the 9.76 cent and 9.77 cent CASM excluding fuel, special items and profit sharing at American and Delta, respectively, in the first quarter.
The carrier expects CASM excluding fuel, special charges, profit sharing and third-party expenses growth to improve throughout the year. It anticipates a 1.25% to 2.25% increase in the second quarter and a roughly 1% increase in the second half of 2014.
United anticipates an average fuel price of $3.10 to $3.15 in the second quarter.
Rainey says the airline is on track to achieve a 1.5% improvement in fuel efficiency in 2014. This will result in roughly $200 million in annual savings, he adds.
System capacity will be flat to up 1% in the second quarter. Fleet changes include removing nine Boeing 757-200s and 18 Embraer ERJ145s, and adding nine Boeing 737-900ERs and six Embraer 175s during the period.
United moved many of the ERJ145 retirements forward from the third quarter, which is likely due to the decision by regional provider Republic Airlines to retire 12 of the type it operates for the airline by the third quarter.
System capacity is expected to increase 0.5% to 1.5% in 2014, which is down from previous guidance of a 1% to 2% increase.
“Our lower capacity guidance is largely due to weather related cancellations in the first quarter and lower regional flying throughout the year,” says Compton.
United plans to remove nine more ERJ145s from its fleet during the year than it planned to in January. This is likely due to the Republic retirements.
The airline also plans to take one less 737-900ER for a total of 29 instead of 30.
Gross capital expenditures are expected to be between $770 million to $820 million in the second quarter and $2.9 billion to $3.1 billion for the full year.