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United Airlines Pays a Price for Being No. 1 in China

Chicago (TheStreet) -- Judging from its first-quarter results, United Airlines (UAL) has many problems, of which some no doubt are due to management. Some but not all.

Among the factors that led to United's distressing first-quarter results was a strong presence in China, normally viewed as one of its biggest assets.

First-quarter revenue on United's Pacific routes declined 5% to $1.1 billion and Pacific PRASM fell 6.3%.

Overall, United's consolidated PRASM fell 2%. Domestic PRASM gained 1.4%, Atlantic fell 3.4%, and Latin America fell 1.7%. So the Pacific was the worst performer - even though we are told over and over again, by aircraft makers, automakers and nearly everybody else, that Asia is the global region with the highest growth potential.

At Delta (DAL), Pacific revenue fell 5.3% to $827 million and Pacific PRASM fell 5%. But Delta, currently the star of the U.S. airline business, said it is making gains in China.

On United's first-quarter earnings call, Vice Chairman Jim Compton said the detrimental impact of Pacific operations is continuing into the current quarter, when Pacific results likely will reduce year-over-year passenger revenue per available seat mile by one to two percentage points.

"There's no doubt that competitive capacity pressures from the U.S. to Asia, particularly to China, where we are the largest U.S. airline by far, have ... pressured our unit revenue," said CEO Jeff Smisek during the carrier's earnings conference call on Thursday.

"That said, we make good money in Asia today, even with that pressure," Smisek said. "We expect to continue to make good money to Asia. We expect to not only maintain our lead there, but we would have opportunities to grow in the new markets."

Unfortunately for United, capacity between the U.S. and China has increased more than 30% since 2012. In the current quarter, capacity will be 20% higher than it was a year earlier. United has 7% of its total capacity in China/Hong Kong markets, while American (AAL) and Delta each have about 2% of capacity there, according to Deutsche Bank analyst Mike Linenberg.

Moreover, Japan, where United also has a strong presence, presents its own problems: "The depreciation of the Japanese yen and weakening Japanese economy continue to be a drag on our Japan results," Compton said.

United is not standing still in Asia. While most U.S.-to-China flights serve Beijing and Shanghai, United -- making full use of the Boeing  (BA) 787 -- is taking the lead in opening new markets. The first non-stop flight ever from the U.S. to Chengdu will depart San Francisco on June 9.

Chengdu "represents the start of the second phase of our Pacific strategy, which focuses on secondary Asian cities," Compton said. "It's also a perfect example of the power of the 787 Dreamliner. Its long range and appropriate gauge make it an ideal aircraft for routes such as this." He said United is pleased with early bookings.


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