United Continental (UAL 0.12%) reported a record profit on Thursday, just a week after its new CEO, Oscar Munoz, suffered a heart attack that has left the company scrambling to keep its momentum going.
It's impossible to know when Munoz may return or how effectively United will operate under the leadership of acting CEO Brett Hart. However, investors can at least take comfort from the fact that United's turnaround effort is still on track.
United's quarter: By the numbers
United Continental posted a 2.4% year-over-year revenue decline last quarter, as a 2.1% increase in capacity was more than offset by lower revenue per available seat mile. United's third-quarter revenue of $10.31 billion was right in line with analysts' expectations.
In total, passenger revenue per available seat mile (PRASM) declined 5.8% year over year in Q3. That was near the midpoint of United's updated guidance. Domestic PRASM fell just 1.6%, whereas international PRASM plummeted 9.3% year over year. The weak international numbers were caused by the strong dollar and falling fuel surcharges for many international routes.
United's costs dropped sharply last quarter, primarily due to plummeting fuel prices. Economic fuel expense fell to $1.97/gallon during the quarter -- despite hedging losses of $0.25/gallon -- compared to $3.01/gallon a year earlier. Non-fuel unit costs (excluding profit sharing and other items) declined 1.5% year over year as United's multi-year cost-cutting program gained traction. The strong dollar also reduced operating costs in foreign markets.
United's revenue fell last quarter, but costs fell even more.
The sharp drop in unit costs, particularly from fuel, drove a 65% year-over-year increase in EPS, to $4.53. This was just $0.02 shy of the average analyst estimate.
Looking ahead
For the fourth quarter, United expects slight improvement in its unit revenue trajectory. PRASM is expected to decline 4%-6%, compared to last quarter's 5.8% decline.
To get its unit revenue back on track, United is moderating its international capacity growth. In Q3, United increased domestic capacity by just 0.5%, while it boosted international capacity by 4% compared to the prior-year quarter. By contrast, in Q4, United plans to grow international capacity just 0.6%-1.6%, while growing a little faster in the domestic market.
That said, United probably needs to be even more aggressive in pruning international capacity in order to return to unit revenue growth in 2016. Earlier this year, United announced plans to reconfigure 10 widebody 777-200s for domestic service, which will definitely help on that front.
Even with PRASM continuing to fall at a mid-single-digit rate, United Continental expects to post another substantial profit improvement in Q4. The company expects its pre-tax margin to reach 9.5%-11.5%, compared to just 5% in Q4 2014. Once again, the profit growth will be driven by tight non-fuel cost control and lower fuel prices.
For 2016, United is on pace to continue benefiting from fuel cost savings, as it has incurred substantial hedging losses in 2015 but hasn't hedged much for next year. As a result, if the company can stabilize its unit revenue, its pre-tax income should continue rising. But it will be important to hear about United's plans for getting unit revenue back to the flat line.
Longer term, United will need strong leadership to claw its way back to the top of the industry. With United Continental now on its third CEO over the past two months, this is still a big question mark.
