Airline stocks have flown ever higher over the past year, and United Continental Holdings (NASDAQ:UAL) has benefited from the same positive trends as its airline peers, including cheaper fuel costs, constrained competition, and high travel demand. With the airline having reported its fourth-quarter earnings earlier this week, most investors in United Continental are more confident than ever in the prospects for the industry. Yet smart investors still pay attention to what company executives have to say about the future success of their business. Let's look at five comments from United Continental's conference call that are worth a closer look.
"We will be opportunistic with our use of the additional cash we expect to generate as a result of lower fuel prices. We will use this cash to accelerate our path toward longer-term goals we previously identified, including reducing our financial leverage and continuing to return cash to shareholders through our share repurchase program." -- CEO Jeff Smisek
Fuel costs have plunged throughout the airline industry, making it possible for United Continental and its rivals to consider what to do with this unexpected windfall. On one hand, airlines have aggressively updated their fleets, buying new aircraft in order to reduce operating expenses. Yet Smisek notes that United intends to keep delivering much of this newfound money back to shareholders while also seeking to cut back on debt. For investors who remember the long periods of losses in the industry, it's welcome news to hear executives being prudent about what could prove to be a temporarily tailwind for United Continental's financial results.
"This month, we also closed out virtually the entire remaining portion of our first-quarter [fuel] hedge positions. ... Our current full-year hedge position allows us to participate in 84% of any future declines in the price of oil." -- CFO John Rainey
One unfortunate thing about United Continental's situation is that despite the fact that the airline has benefited from lower operational expenses, it had already hedged much of its fuel-cost exposure. Hedges cost United Continental $237 million in the fourth quarter, and Rainey expects further first-quarter losses from hedges of $190 million. Moreover, remaining hedges for the remainder of 2015 have unrealized losses of about $680 million at current prices.
United's moves to eliminate hedges will stop the flow of losses if oil prices continue to fall, but they'll leave the airline more exposed if fuel costs bounce back from their current low levels. Even as fuel costs have fallen, United has still moved forward with fuel-efficiency gains, with the airline expecting further gains of 7% in fuel efficiency by 2017.
"I would like to talk about two initiatives designed to improve our departure and arrival performance. The first is focused on achieving on-time departures, [while] we are also focused on improving our on-time arrivals." -- COO Greg Hart
Customer service for airlines comes from many different corners, but one of the most visible metrics in the airline industry is a carrier's track record of on-time departures and arrivals. With so many interconnected flights involved in a hub-based model, late flights can result in missing connections and jeopardize an entire itinerary.
United Continental has implemented several projects to improve its performance. On the departure side, United is using data-collection and analytical technology to detect problems early on in order to coordinate the proper solutions. Meanwhile, the airline hopes to cut arrival delays by allowing pilots to bring planes into the gate area without the help of ramp agents, and tools to manage which flights go to which gates can also ensure that planes don't have to wait on the tarmac any longer than necessary. If successful, United expects its customers to be happier about the service they receive.
"Our stock price increased 77% [in 2014], and we returned approximately $320 million of cash directly to our shareholders since initiating our share repurchase program last summer. We also prepaid $310 million of convertible debt that was convertible into 5.8 million shares." -- Rainey
United Continental is doing a good job of balancing treating its shareholders well and shoring up its balance sheet. On one hand, paying off high-cost debt makes the company more attractive and avoids the dilution that can result from convertible-bond investors exercising their rights to convert their debt into new shares. On the other, share buybacks help support earnings per share, which can push share prices up further.
Looking forward, investors can expect more of the same from United Continental. The company has $680 million left in authorized share repurchases, and if it can reduce long-term debt levels further, then investors should feel more confident about United's ability to survive the next cyclical downturn for the industry -- whenever it comes.
"I do think that the capacity of discipline that has been shown by U.S. carriers is not necessarily shown by international carriers. And I think that [capacity growth internationally] is certainly a possibility, particularly in areas with a lot of growth such as low-cost carriers in Asia." -- Smisek
A big part of United's success has come from the consolidation of the U.S. airline industry. It's easier to avoid fare wars when there are fewer industry players, and strong domestic pricing power has been a large factor in profit increases throughout the sector. Yet overseas, the competitive picture is much different, and it's harder for United to reap the same rewards. In particular, as international carriers seek to offer more service to certain markets, United could see pressure on margins that would take away from some of its gains domestically.
United Continental is fortunate to have a number of favorable trends supporting its business heading into 2015. To make the most of them, though, the airline will have to push as hard as possible to reap maximum rewards as long as the good times last.