On Wednesday afternoon, United Airlines (NASDAQ:UAL) became the latest airline to report earnings for the third quarter. As expected, the airline giant posted an ugly quarterly loss and burned a lot of cash.
That said, results improved compared to the second quarter. Moreover, United Airlines executives claimed that when the final Q3 numbers are in, the airline would outperform its full-service airline rivals, Delta Air Lines (NYSE:DAL) and American Airlines. Management also said that United was likely to reach cash breakeven before those key rivals. Let's take a look at the carrier's results and sort out fact from fiction.
The headline numbers
United Airlines generated $2.5 billion of revenue in the third quarter, down 78% year over year. For the second straight quarter, the carrier benefited from its strong position in key cargo hubs, which allowed it to post a 50% jump in cargo revenue. However, that couldn't come close to offsetting an 84% plunge in passenger revenue and a 32% decline in other revenue.
Meanwhile, United Airlines reduced operating expenses (excluding special items) by 48% year over year on a 70% capacity reduction. This led to a $3 billion adjusted pre-tax loss and an adjusted loss per share of $8.16. On average, analysts had expected a somewhat smaller loss of $7.53 per share.
Finally, United said that daily cash burn averaged $25 million last quarter, of which $4 million a day related to debt principal payments and severance payments. This result was roughly in line with management's guidance.
Did United outperform Delta?
American Airlines hasn't reported its third-quarter results yet, but it's a good guess that they will be worse than what United reported, as was the case a quarter earlier -- and for most of the past few years. However, compared to what Delta Air Lines reported earlier this week, United's results were a mixed bag.
On the revenue front, United did outshine its rival, largely because Delta hasn't been able to capitalize on the cargo revenue opportunity. (Delta's cargo revenue fell 25% year over year to $142 million, compared to $422 million for United.) In total, Delta reported a 79% drop in adjusted revenue -- slightly greater than United's revenue decline -- despite a smaller capacity reduction of 63%.
United's cash burn was also somewhat better than Delta's, although the comparison is difficult because every airline calculates cash burn differently. Delta's preferred metric seems closest to United's cash burn excluding debt principal payments and severance payments. On that basis, Delta burned an average of $24 million per day in the third quarter, compared to United's $21 million per day.
On the other hand, Delta did a better job of reducing costs, with adjusted operating expenses down 52% year over year. That was four percentage points better than United Airlines, even though Delta didn't cut capacity as deeply. Labor costs were the difference maker. Delta was able to reduce its labor costs by 42% year over year, largely due to a massive number of employees taking voluntary leaves and the absence of profit sharing. For comparison, United's labor costs fell 27%.
Thanks to its cost-cutting prowess, Delta reported a $2.6 billion adjusted pre-tax loss, more than $400 million better than United's result. That said, airlines have a lot of discretion right now about which expenses to classify as special items, making such comparisons somewhat unreliable.
Will United recover fastest?
During United Airlines' recent earnings call, management argued that the company would turn cash positive sooner than either of its main rivals, due to its disciplined capacity deployment. United executives also suggested that it will eventually emerge from the pandemic with a strengthened competitive position.
Investors should take these claims with a grain of salt. To management's credit, United has done a good job of managing through the pandemic and carefully tailoring capacity to demand in order to minimize cash burn. But the airline is benefiting in a big way from a surge in cargo rates that is likely to reverse soon as airlines restart more international passenger flights, bringing more belly freight capacity onto the market. Additionally, Delta has been capping onboard load factors and blocking middle seats, unlike United. When Delta removes those restrictions (probably in the first half of 2021), its cash flow should improve significantly.
Looking further out, Delta has acted more aggressively to unlock long-term savings since the pandemic began, mainly through fleet simplification. So while United Airlines has positioned itself to survive, it will probably continue to trail Delta Air Lines in terms of profitability for a long time.