United Makes a Big February Comeback

United Airlines had a surprisingly strong February, leading the major airlines in unit revenue gains for the first time since 2011. Unit revenue is a key indicator of demand for airlines and has an important impact on profitability. It's therefore helpful to follow the results they report each month. Here's how the top five U.S. airlines did last month:

February Unit Revenue Performance for Top Five U.S. Carriers

Airline Unit Revenue Increase
AMR (UNKNOWN: AAMRQ.DL  )  4.7%
Delta Air LInes (NYSE: DAL  )  5%
Southwest Airlines (NYSE: LUV  )  2%
United Continental (NYSE: UAL  )  6.5%-7.5%
US Airways (NYSE: LCC  )  1%

Source: airline press releases.

Delta produced a solid gain as always and has been consistently in the top half of the industry for two years running. American Airlines parent AMR's gain shows that it's continuing to gain traction, now that its future is more certain. During the month, AMR announced plans to merge with US Airways to form the world's largest airline.

Future merger partner US Airways wasn't so lucky, though. It brought up the rear last month, a result it attributed to its heavy exposure to the Northeast, where many schools canceled February vacations to make up for school days lost to Hurricane Sandy in the fall.

Finally, Southwest posted another lackluster performance in February. It has been integrating its AirTran acquisition very slowly, which may account for its recent underperformance. However, the company recently hit a milestone as it connected the two networks, which should improve results this spring and summer.

United's surprise
United's approximately 7% unit revenue increase was definitely the big news of the month, and it provides some comfort to investors that the company is finally outgrowing its merger pains. Investors sent United Continental stock up nearly 6% on Friday, to $31.35, its highest closing price since early 2008.

However, it would be rash to jump right in and buy United today on the basis of a single month of results. In 2012, United posted very weak unit revenue growth of 2% in February. The company stated at the time that its performance was negatively affected by 6% because of three factors: an accounting change in 2011, higher completion factor (i.e., fewer flights canceled because of weather or maintenance problems), and the integration of the United and Continental reservation systems.

These one-time effects hurt United in February (and, to a lesser extent, March) last year, creating an easier comparable figure to beat. Last month, United's completion factor dropped to 98% from 99.2% in 2012, creating a unit revenue tailwind. United also shrank capacity by 8.4% (approximately 5% adjusting for the leap year); flying fewer seats tends to boost unit revenue, but it also increases unit costs. Since United plans to keep full-year capacity flat to down 1%, capacity reductions won't provide such a significant tailwind going forward.

Conclusion
United's performance last month was certainly stronger than expected, and the company should be given credit for that. However, I am still very skeptical about the company's overall performance. There were several one-time factors that boosted United's results last month, and given its track record, the company needs to post several months of strong performance before investors can be more confident that United is on a sustainable upward trajectory.

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