United Continental Holdings (UAL -0.08%) yesterday reported its highest quarterly profit in the history of the company. The airline managed to squeeze out just enough extra revenue and profit to top analyst estimates. The good news gets better as it wasn't an anomaly -- United expects further new records to come in the quarters ahead.
The first class results
Revenue rose 3.3% to $10.6 billion while net income jumped 99% to $1.1 million or $2.75 per diluted share. Revenue was slightly shy of analyst estimates for $10.56 billion but EPS beat slightly with $2.75 compared to the $2.68 average estimate.
CEO Jeff Smisek credited the success from the company's employees but, more importantly, he sees further opportunity ahead. Smisek stated, "We still have significant opportunity ahead to grow our margins and improve the quality and efficiency of everything we do."
Part of the reason for the profit increase was the ancillary revenue jumping 10.9% to $22 per passenger. Ancillary revenue is other services such as checked-baggage fees, selling food on the plane, headsets, etc. This type of revenue tends to have a much higher profit margin than tickets alone and, as such, working to increase these is becoming an increasingly lucrative part of airlines' business model.
Moving forward
The company is rolling out further strategies to increase ancillary revenue. Some examples include rapidly deploying Wi-Fi across its fleet of planes, personal device entertainment, upgrades to food offerings, and being the first company to offer services for Uber, which is available via the United app.
United Airlines has a goal of saving $2 billion annually from reduced costs and inefficiencies by the year 2017. For example, part of this took place in the quarter in the form of "enhanced" one-time severance packages to flight attendants who retire (or resign) early and lighter and slimmer seats on certain planes, which reduces fuel costs and expands seat capacity. The new seating is expected to add one to two extra rows per plane.
CFO John Rainey stated, "We are executing against our $2 billion cost reduction plan, improving our balance sheet, returning cash to shareholders and continuing to make return-driven investments in our product." United Airlines expects to save $500 million in total for 2014 with an eye on increasing that to the full $2 billion so quarterly profit has the potential to continue to break records.
One thing that will certainly help United Airlines is the steep drop in oil prices lately from over $100 per barrel to near $80. Cheap jet fuel, which is of course made from oil, will only boost United Airline's bottom line and save it money. According to its filings with the SEC, fuel is the No. 1 operating cost yet United Airlines only hedges a fraction of that. Add to the cheap gas further increased efficiencies in using fuel itself and a large portion of the $2 billion in savings will come from fuel.
Overall, it appears United Airlines is achieving its goals and has a bright future ahead. Overall, I'm not a fan of airlines long term just because there are so many things that seem to happen over the decades that seemingly come out of left field, but if I had to invest in a major airline United Airlines would probably be it.
