On Tuesday afternoon, United Continental (NASDAQ:UAL) released its second-quarter earnings results. Adjusted earnings per share reached $2.75: up about 5% year over year and comfortably above the average analyst estimate of $2.63.

Nevertheless, United Continental's earnings report wasn't cause for celebration. First, the company's profit margin continues to decline. Second, United isn't making any tangible progress in catching up to industry leader Delta Air Lines (NYSE:DAL) in terms of profitability.

United ekes out some EPS growth in Q2

Entering the second quarter, United Continental projected that it would earn a pre-tax margin of 10% to 12% for the full quarter. However, it boosted its guidance twice during the quarter. By last week, it had raised its forecast range to 12.5% to 13.5%.

A United Airlines plane

United Continental increased its Q2 margin guidance during the quarter. Image source: United Airlines.

Ultimately, United posted an adjusted pre-tax margin of 13.2%, down from 14.5% a year earlier. It was able to eke out modest EPS growth despite the margin decline due to a combination of revenue growth and a lower share count (driven by heavy buyback activity in 2016).

There were three reasons United's profit margin exceeded the company's original guidance. First, the air cargo market strengthened, leading to better cargo revenue. Second, fuel prices declined during the quarter. Third, non-fuel unit costs didn't rise as much as originally expected during Q2, mainly because some spending shifted to later in the year.

Notably, passenger revenue per available seat mile (PRASM) wasn't a source of outperformance for United. PRASM increased 2.1% year over year: almost exactly at the midpoint of the guidance range provided back in April.

Meanwhile, Delta Air Lines posted slightly higher PRASM growth of 2.5% despite losing $115 million in revenue after a wave of severe storms disrupted operations at its Atlanta hub in April. This allowed it to maintain a big margin advantage over United, with a 17.2% adjusted pre-tax margin.

A Delta Air Lines plane

Delta's adjusted pre-tax margin was 4 percentage points above United's in Q2. Image source: Delta Air Lines.

The third-quarter guidance doesn't look good

United Continental's outlook for the third quarter -- which includes the summer peak season -- is even more discouraging. United expects PRASM to be flat year over year (plus or minus 1%) on a 4% capacity increase. As a result, management's guidance calls for a pre-tax margin of 12.5% to 14.5% for the third quarter.

This would be roughly in line with United's Q2 margin performance. However, the company achieved an adjusted pre-tax margin of 15.7% in Q3 2016 and 16.6% in Q3 2015. Unless United Continental reaches the high end of its PRASM and margin guidance ranges, EPS will probably decline year over year this quarter, falling short of analysts' expectations.

Delta Air Lines remains the leader by a mile

United Continental's third-quarter forecast shows that for all its talk about closing the "margin gap," the company remains well behind Delta in terms of profitability. Unlike United, Delta Air Lines expects PRASM growth to accelerate this quarter, rising 2.5% to 4.5% year over year.

The wide gap between the two carriers' revenue forecasts suggests that the backlash against United Airlines' well-publicized customer service fiascos may be coming back to haunt United.

Be that as it may, Delta believes its strong unit revenue growth will enable it to achieve an 18% to 20% operating margin this quarter. This translates to a 17% to 19% pre-tax margin. Thus, Delta is on track to exceed United's pre-tax margin by 4-5 percentage points in what should be the strongest quarter of the year for United Continental.

United claims that it will capture more than 70% of the benefit from its $3.8 billion profit improvement plan during the next three years. Still, given that the first 30% of improvement has had no tangible impact on United's earnings, investors can't be very confident that the company will be able to fulfill its goal of matching Delta's profitability.

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