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Productivity Trumps Fuel Costs at UAL

Ted Reed

UAL(UAUA), the parent of United Airlines, posted third-quarter net income of $190 million, a result of higher ticket prices and a continued effort to boost productivity following its February emergence from bankruptcy protection.

The second-largest airline said net income equated to $1.30 a share on revenue of $5.2 billion, up 11%. Analysts surveyed by Thomson Financial had forecast earnings of $1.43 a share on revenue of $5.2 billion. On a conference call, CFO Jack Brace said the company would have earned $1.73 per share had it not allocated 43 cents to account for income tax expenses.

United said it showed a year-over-year $95 million improvement in net income after special items. It said that continued revenue and productivity enhancements more than offset a $293 million increase in the cost of fuel. Shares of United fell 83 cents, or 2.3%, to $35.94.

United has been widely criticized for not securing more cost improvements during its three-year stay in bankruptcy. But CEO Glenn Tilton said that following its emergence, the airline has been able to involve employees in cost-cutting through numerous initiatives that each produce their own savings.

"One of the things we get to do, post-exit [is] to involve all of our employees in activity that is much more relevant to them, in identifying and realizing cost-saving initiatives," he said. "If we can improve the customer experience, improve employee engagement, and simultaneously improve our costs, I think we're going to ring the potential out of this company that has always been here."

United said it has captured $300 million in cost and revenue benefits targeted for 2006, as well as $135 million that was sought for next year. As a result, mainline cost per available seat mile, excluding fuel and special items, was 7.08 cents, down by 0.4%. Meanwhile, mainline passenger revenue per available seat mile rose 10.2%.

Consolidated capacity rose 3.1% and is expected to climb just 1% in 2007, driven entirely by higher aircraft utilization.

United said the impact from security changes following the disclosure of a failed terrorist plot in the U.K. to blow up airplanes was "nonmaterial." While several low-cost carriers have identified significant impacts, Brace said "we were solidly booked going into it [and suffered] less customer disruption than others did."

Tilton reiterated his long-standing contention that consolidation would benefit the industry, but acknowledged that industry response has been muted. "I think the reaction has been personal [to individual companies]," he said. "Other industries have benefited, but at the end of the day it's at the discretion of individual participants."

As of Sept. 30, UAL's cash position was $4.9 billion, including $860 million in restricted cash. "We clearly have more cash than is optimal," said Brace. "Our first priority will be to reduce debt levels."