For the past several years, United Continental (UAL +9.81%) has lagged well behind its main rivals in terms of profitability. Investors are becoming increasingly impatient about the company's underperformance, as evidenced by the fact that United shares now trade for just five times forward earnings.
New CEO Oscar Munoz's arrival last fall gave investors some hope that the company could get back on track. However, unit revenue has been declining at an alarming rate due to a combination of sluggish demand in some markets, and overcapacity in most regions of the world. This will put pressure on United's margins in the next few quarters.
United Airlines' unit revenue has been under pressure around the world. Image source: The Motley Fool.
To address investors' concerns, and explain United's turnaround strategy, the company plans to hold an investor conference call on Tuesday morning. Investors should be looking for details on the following three issues, in particular.
New cost-cutting targets?
At United's last investor day, back in late 2013, the company announced a cost-cutting initiative called "Project Quality." The goal was to reduce annual costs by $2 billion by 2017, with $1 billion coming from fuel, and $1 billion coming from non-fuel categories like improving productivity. United is on track to meet the $1 billion non-fuel cost reduction target in 2016 -- a year ahead of schedule.
United's management has previously suggested that the company has additional cost-reduction opportunities ahead. It's time for the company to explain and quantify these future cost-cutting plans.
The retirement of United Continental's fleet of 22 expensive-to-operate 747-400s by the end of 2018 should help. United will replace them with brand-new 777-300ERs and A350-1000s. In addition to being far-more reliable, the new planes will have nearly as many seats as the 747s, but will burn much-less fuel, and cost much less to maintain.
Another big initiative is United's move away from inefficient 50-seat regional jets. The company has stated that it plans to reduce the 50-seat jet fleet from more than 250 planes at the beginning of 2016 to fewer than 100 by the end of 2019. It will replace them with small mainline planes -- primarily 737-700s that it was able to buy at a huge discount earlier this year.
United recently ordered 65 737-700s to replace most of its 50-seat jets. Image source: The Motley Fool.
United also has other opportunities to cut costs: for example, investing in self-service technology, and adding seats to some of its airplanes. Munoz and his team now need to show how all of these initiatives fit together and provide clear targets for unit costs for the next several years.
Regaining a revenue premium
United Continental also needs to provide more details on its revenue strategy. Earlier this month, United unveiled its new take on international business class, dubbed Polaris. The new business-class seats will be a huge upgrade over most of the international business-class seats in United's fleet today.
However, United's announcement didn't provide much detail on how quickly the new business-class seats could be introduced to its fleet. Offering a consistent experience will be critical to winning back lapsed customers. Hopefully, management will explain the timeline for retrofitting the existing international fleet on the investor call.
United is upgrading its international business-class seats. Image source: United Airlines.
Another big decision for United is whether to downsize or eliminate any of its underperforming hubs. Munoz will need to demonstrate that he has a plan to improve results in struggling hub markets -- or to move capacity to markets where United has a bigger competitive advantage.
Achieving labor peace
A third key issue that United needs to address is its efforts to achieve lasting labor peace. The company has made a lot of progress on this front since Munoz took the helm last year. However, two key work groups -- flight attendants and mechanics -- still don't have joint collective bargaining agreements.
That's pretty pathetic, considering that United and Continental merged nearly six years ago. Fortunately, United may finally be close to reaching a tentative agreement with its flight attendants.
Airlines are always reluctant to discuss labor negotiations in public. Still, investors should watch for any hints that management might provide about the status of the flight-attendant negotiations. Reaching a new contract, and improving flight-attendant pay could go a long way toward improving morale. Re-energizing this important group of front-line employees is a key priority as United tries to improve its service standards to win back business travelers.
Setting clear goals and executing
United Continental's management needs to set clear goals for the company during the upcoming investor call. That will give investors a sense of what to expect in the next few years.
Right now, expectations are very low, as evidenced by United's bargain-basement valuation. For the stock to get back on track, the company will need to show continuous progress toward the goals it sets out this week.
