United Continental (NYSE:UAL) reported strong earnings growth in Q2. Like other major airlines, United Continental is benefiting enormously from the drop in oil prices since last year while facing patches of weakness in the fare environment, particularly on international routes.

Nevertheless, the key takeaway from this earnings report is that United is recovering from a period of weak profitability. It may even be making up some ground on industry rivals like Delta Air Lines (NYSE:DAL), which it has long lagged in earnings power.

United's quarter, by the numbers
United Continental generated revenue of $9.91 billion last quarter, down from $10.33 billion a year earlier and just a tad less than the average analyst estimate of $9.94 billion.

Its pre-tax margin expanded to 12.7% from 8.9% in Q2 2015. This resulted in net income of $1.26 billion and EPS of $3.31, which matched the analyst consensus estimate. EPS grew 41% over the prior-year figure of $2.34.

United Continental's passenger unit revenue, or PRASM, dropped 5.6% last quarter as more seats flew empty and average fares declined. Unit revenue declined 3.4% on domestic mainline routes and 1.7% on regional routes. As has been the case for other airlines, international routes were the worst performers, with PRASM down 8.1% year over year in Q2.

A big decline in fuel costs helped United produce its strong profit growth despite the weak revenue environment. The average fuel price it paid declined 30% year over year. Meanwhile, it made solid improvements on fuel efficiency, using the same amount of fuel as in Q2 2014 despite increasing capacity by 2.3%.

Excluding volatile items like fuel, profit sharing, third-party business expenses, and special times, United's unit costs rose just 0.3%. Including all of these items, unit costs declined 12.2% year over year.

Looking ahead
United Continental has trimmed its capacity growth plans for the rest of the year in light of the sluggish revenue environment. It now plans for full-year capacity growth of 1%-1.5%, down from an earlier view of 1%-2%.

Nevertheless, United expects another big PRASM decrease of 5%-7% in Q3. This is roughly in line with the 4.5%-6.5% Q3 PRASM decline that Delta projected last week.

Once again, this soft unit revenue performance will be more than offset by lower fuel costs. United expects that its pre-tax margin will reach 13.5%-15.5% next quarter, up from 10.2% in Q3 2014. Even the low end of that range would lead to EPS roughly in-line with the average analyst estimate of $3.63, while the high end of the guidance offers plenty of upside potential.

Gaining on Delta?
For the past few years, Delta Air Lines has consistently led the major airlines in profitability, while United Continental has been the biggest laggard. But United narrowed the profitability gap somewhat last quarter, as its 41% EPS gain easily outpaced Delta's 22% increase.

This gap was accentuated by a bigger hedging loss at Delta. However, at the midpoint of its Q3 guidance range, United would outpace Delta in EPS growth again this quarter -- albeit by a smaller amount -- despite being on an even footing in terms of hedging losses.

It's still too early to say that United Continental is closing the profitability gap with Delta Air Lines. But at the very least it has stabilized its relative profitability vis-a-vis the industry leader.

Increasing capital returns
United Continental also had one more treat for investors in the earnings report. The company announced that it plans to complete its ongoing $1 billion share repurchase program by the end of this quarter, and the board authorized a new $3 billion buyback.

This would be enough to retire about 14% of the company's outstanding shares, based on United's recent stock price. Investors liked the sound of that. Thanks to the relatively solid Q3 profit outlook and the new buyback, United Continental stock rose more than 3% in pre-market trading.

Adam Levine-Weinberg owns shares of United Continental Holdings, and is long January 2017 $40 calls on Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.