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Time to Stop Doubting United Continental's Growth Strategy?

By Motley Fool Staff – Updated Apr 21, 2019 at 10:09PM

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The passenger airline beat expectations on earnings after a move many pundits predicted would damage the bottom line.

Check out all our earnings call transcripts.

If you've flown anywhere in recent years, you know that the skies have gotten pretty darn crowded. Profit-hungry airline executives have been tightly calibrating capacity with demand so that there are far fewer empty seats -- if any -- on most flights. Thus, word a while back that United Continental (UAL -3.15%) was going to increase capacity across its system earned serious ire from Wall Street. That path to growth was viewed as a direct flight to lower fares, lower margins, emptier planes, and rivals making similar profit-slicing moves to avoid losing market share.

However, as MarketFoolery host Mac Greer and senior analysts Emily Flippen and Jason Moser discuss in this segment of the podcast, those fears are proving unfounded. The trio dig into the latest earnings numbers from United and where it is leading the industry.

A full transcript follows the video.

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This video was recorded on Jan. 16, 2019.

Mac Greer: Let's turn our attention to the airlines. Emily, shares of United Continental up around 6% at the time of our taping after United reported-better-than expected earnings and revenue.

Emily Flippen: This is really shocking, I think, to a lot of United investors. Last year, United said they were going to achieve a new strategy for growth via increasing capacity. And the market just killed them for it. I think a lot of people in their minds thought, "Increased capacity means lower prices, competitors are going to increase their capacity, then we're going to see a bunch of airlines price for disaster because we're competing over fares and who can be the cheapest, and it's just not an environment that you want to be in."

This is their first earnings throughout 2019, and it's better than expected. They're seeing that they're actually making a lot more revenue from the increased capacity by expanding their bases. I think they're going to continue that strategy throughout 2019. It's really interesting, this news. I don't think a lot of investors were necessarily expecting it. But when you look at the hard numbers of what they're doing, it shouldn't be much of a surprise.

Greer: Is this a case of a business getting more efficient? Or are they just able to charge a lot more? Or both?

Flippen: Both, for sure both. The seat prices, we see going down, but the extras go up. By expanding the capacity, building out their three main home bases and making them more accessible, I think their idea is not that airlines are competing over the same customer, but they're actually drawing more customers to fly as a result.

Greer: Jason?

Jason Moser: Pretty sure, also, that Matty Argersinger was telling us to keep an eye on the airline industry for 2019.

Greer: He was.

Moser: That's in line with a lot of what Emily was just saying.

Emily Flippen has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. Mac Greer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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