If United Continental Holdings (NASDAQ:UAL) management could only tell you one thing, it would probably be that the stock price is going a lot higher. But since its corporate attorneys wouldn't like that, we'll just have to study their comments and plans from the latest conference call to see where they expect the fundamentals to be in a few years. If those plans unfold as hoped, the stock price will likely take care of itself.
1. It wasn't a fluke
The fantastic third quarter report, along with its highest quarterly profit in the company's history, was no accident. Pretax earnings were $1.1 billion and earnings per diluted share were $2.75, or nearly double what they were last year. CEO Jeffery A. Smisek explained:
Our revenue results demonstrate the progress we're making in our revenue management, network and express operation, while our solid cost performance largely reflects the early results of Project Quality, designed to deliver $2 billion of annual cost savings by 2017.
The macro environment, including falling energy prices, probably didn't hurt either, but Smisek wants to make it clear the company's execution and hard work from its employees should get the most credit.
2. More capacity during peak times
Chief Revenue Officer James E. Compton had a lot to say about opportunities to expand revenue. The plan is to shift flights away from low-demand times and over to higher-demand seasons such as summer. As an example, Compton stated:
In July 2015, we will fly over 40% more trans-Atlantic capacity compared to February 2015, while we expect our full year trans-Atlantic capacity in 2015 to continue to reflect appropriate capacity discipline.
For Latin America, the growth starts now with the company responding to increased demand to beach destinations. Compton said:
This fourth quarter, seasonal growth allows us to more opportunistically and efficiently redeploy marginal capacity from elsewhere in the network on a seasonal and day-of-week basis.
3. Better flight, even more revenue
United recognizes passengers need and want to stay connected to the Internet and enjoy streaming services as well. It makes for a more enjoyable flight, which helps people choose United while it also allows more revenue and profit opportunity. On this end Smisek stated:
We're continuing to take steps to improve the customer experience for our passengers, including installing in-flight satellite-based WiFi and streaming video on our mainline fleet as well as adding WiFi and streaming video on our 2-cabin regional fleet. As of today, we have WiFi in more than half of our mainline aircraft, nearly 200 of which are equipped with streaming video. By the end of the year, 2/3 of the mainline fleet will have WiFi, and we will have begun installation on our 2-cabin regional fleet.
4. Costs examined under a microscope
United's daily goal is to examine costs and see what can be reduced from the system. All things being equal, each dollar saved is an extra dollar straight to the pre-tax bottom line. Senior Vice President Gregory L. Hart mentioned that one initiative currently in the works is figuring out how to reduce volatility in operations by having key spare parts strategically positioned to reduce interruptions. Hart explained:
Through this effort, we've reduced spare parts-related cancellations in the third quarter by more than 20% year-over-year. This improvement in reliability allows us to reduce the number of spare aircraft, which in turn improves fleet utilization and revenue.
5. Sharing the wealth
Out of its $1 billion authorization under its buyback program, United bought $220 million worth of stock in the open market. CFO John Rainey stated:
We are pleased with the early progress we've made on our $1 billion share buyback program, and we will continue to opportunistically repurchase shares over the coming quarters.
But with the stock at all-time highs you may be wondering if the buyback program is on hold. Luckily somebody asked about that very thing during the Q&A, to which Rainey replied:
We still think this is a great way to return cash to shareholders given where our stock is trading right now, but I've emphasized before, this is a first step. And when we complete this, or get close to completion, we'll come back to the market with our next step, but I'm not prepared to talk any more about that at this point in time.
It sounds like United is more than happy to keep buying back shares even here and will likely announce a further buyback at some point next year. Unless something comes out of left field, it looks like higher revenue, lower costs, and more buybacks are a real possibility going forward.