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United commits to EPS target with or without Max

United Airlines focused its 22 January fourth-quarter 2019 financial results call with analysts on the earnings metric itself, with president and soon-to-be chief executive Scott Kirby saying “that is the key metric” given the uncertainty surrounding the return to service of the Boeing 737 Max.

“We want to focus our efforts and our guidance on earnings,” Kirby says. “If that means we should grow [capacity] 5% to hit our earnings growth targets then that’s what we’ll do.”

The Chicago-based airline did not provide guidance on 2020 capacity during the earnings call. Kirby suggests that moving away from providing guidance on capacity had been in the works before the fatal crashes of Lion Air flight 610 on 29 October 2018, and Ethiopian Airlines flight 302 on 10 March 2019.

“We always actually intended, as we’ve built increasing credibility with hitting our numbers, to stop giving full-year capacity guidance beginning next year,” Kirby says during the earnings call. “Given the uncertainty that we have with the Max we did it a year early.”

The focus on earnings gives United’s Q4 2019 results a sheen that reflects well on the airline’s operational capabilities.

United reported adjusted earnings per share (EPS) of $12.05 for the full year, up 32% versus 2018. For the year, adjusted pre-tax income was $4.1 billion and the adjusted pre-tax margin was 9.4%, up 1.7 points year-over-year. United expects its full-year 2020 adjusted earnings per share will be between $11 and $13.

JP Morgan analyst Jamie Baker writes in a research note that United’s “guidance reticence may not sit well with investors”.

IMPACT OF THE MAX ON COSTS

Non-fuel unit costs (CASM ex-fuel) in the fourth quarter increased 2.7% on a year-over-year basis.

“[United’s] cost structure continues to be hurt by the grounding of the Max,” Cowen analyst Helane Becker writes in a research note.

“This came in better than our original expectations of around 3.5% as our team worked relentlessly to offset various cost pressures,” says chief financial officer Gerry Laderman. “This brought our full-year 2019 CASM ex to up 1.%.”

Cost pressures for United in 2019 included a US government shutdown in January and geopolitical issues in China, Iran and Pakistan. For United, the grounding of the Max towered over them all.

United has 14 737 Max aircraft in storage and 170 on order. Of those on-order Max jets, 16 had first-flight dates set for 2019, Cirium fleets data shows. United has 25 Max jets with 2020 delivery dates, some of which are the 16 that were expected to be in service in 2019. The airline has 50 Max jets with 2021 delivery dates.

On 20 December 2019, United pulled its Max aircraft from its schedules through 4 June. On 21 January, Boeing, which suspended 737 Max production this month, informed its customers and suppliers that it estimates that the “ungrounding” of the Max will begin sometime in the middle of 2020.

The grounding of the Max increased United’s CASM ex-fuel by at least 1% in 2019, Laderman says. “Excluding this impact, unit costs in 2019 would have been flat or better year-over-year.”

United expects first-quarter 2020 CASM ex-fuel to be up 1% to 2% year-over-year. The airline does not provide full-year guidance for CASM ex-fuel.

During United’s third-quarter 2019 earnings call in October, Laderman said “based on preliminary numbers, we expect non-fuel unit costs next year to be flat as compared to this year.”

This expectation was likely shaped by optimistic estimates in fall 2019 that the Max fleet would re-certificated by the US Federal Aviation Administration by the end of the year.

“We have not changed our commitment over the next several years – our goal remains flat CASM ex,” Laderman says. “But for the Max, we would have been at least flat [in 2019]. For 2020, the same is generally true. We currently anticipate the Max creates about 1 to 2 points of CASM ex pressure.”

Echoing Kirby, Laderman says that whatever happens with the Max in 2020, United remains committed to delivering on its EPS target.

Managing capacity and capital expenditures to hit that target will be a challenge for United’s executive team.

“One of the tailwinds we’re going to have, which has now been delayed a little bit, is on gauge,” Laderman says. United had expected the 737 Max 10 aircraft that were to be delivered in 2020 and 2021 to replace smaller-gauge aircraft.

“Until Boeing tells us what the Max delivery schedule is going to look like, it’s just tough,” Laderman says. “Next year would have been a year of significant Max deliveries. Particularly with Boeing having shut down the line, they need to tell us and their other customers how they’re going to allocate slots to everybody. And that will drive a lot of the 2021 capex numbers.”

During the fourth quarter, United took delivery of two new Boeing 777-300ER aircraft and two new Boeing 787-10 aircraft. Deliveries also included one used Boeing 737-700, one used Airbus A319, and nine new Embraer E175 regional aircraft. United in December announced an order to purchase 50 new Airbus A321XLR aircraft, with delivery scheduled to begin in 2024. The XLR order will enable United to finish retiring its remaining Boeing 757-200s.