UAL Aims to Cut More Costs

Excluding reorganization items, the airline loses $306 million during the quarter ended March 31.
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Updated from 7:26 a.m. EDT

United Airlines parent

UAL

(UAUA)

reported a first-quarter loss that was little changed from a year ago and said it will now focus on improvements that include cutting expenses by $700 million annually.

The nation's second-largest airline, which emerged from bankruptcy protection on Feb. 1, said that excluding reorganization items it lost $306 million during the quarter ended March 31, compared with a loss of $302 million in the same quarter a year earlier. Revenue totaled $4.47 billion, up 14% from $3.92 billion a year earlier.

On an operating basis, United reported a first-quarter loss of $171 million, a $79 million improvement over last year despite a $314 million increase in fuel expenses for its mainline and regional operations.

United didn't report a per-share figure for the full quarter, but said it lost $1.95 a share during February and March. On paper, the airline reported a $23 billion profit for the quarter, primarily reflecting accounting for expenses that were shed in bankruptcy.

"The company is ready to put the distractions of restructuring behind us and focus our full attention on margin improvement and reducing costs, realizing our revenue potential and unlocking the full value of (our assets)" said CEO Glenn Tilton during a conference call with analysts. "Our controllable costs for the quarter do not yet reflect United operating at our most efficient level."

For the quarter, mainline revenue per available seat mile was 11.01 cents, up 11.2%, below the industry average gain of about 14% for the quarter. Yield, or revenue per revenue passenger mile, was 11.82 cents, up 9.1%, largely as a result of improved ticket prices.

United's cost per available seat mile was 11.42 cents, up 11.1%, mostly because of fuel-price increases. CASM excluding fuel was 8.03 cents, up 3%.

Shares of UAL were dropping $3.12, or 8%, to $35.85 after the quarterly report.

United said it will find $400 million in annual cost savings for 2007 and beyond. The company had already announced plans to cut $300 million in 2006. "Our nonfuel costs increased in the first quarter," notes COO Pete McDonald. "We are attacking them. We know we can do more to reduce our CASM."

The 2007 cuts will include reduced advertising. "A good bit of our advertising that we launched during our Chapter 11 experience has done its work, and it has created really the customer awareness of the continuum of the products that we wanted," Tilton says. "Frankly, we can harvest it for a little while."

The airline will also seek to reduce "turn times," or the time spent unloading planes and preparing them for their next departure, by eight minutes systemwide. The improvements, which would lead to more efficient hub operations and to increased aircraft utilization, has already started at the San Francisco hub and on flights by United's low-fare operation Ted.

Personnel cuts are also planned, though Tilton indicated that most will involve back-office jobs. For instance, the company recently combined its cargo and airport operations. As a result, he says, "a senior vice president is gone. Where we had two senior vice presidents we now have one. And I don't think that's the last."

On the revenue side, the airline is introducing new products including one that will make first-class seating available on its 70-seat regional jets. Additionally, United has been a leader in seeking improved industry pricing. United had proposed 16 major domestic-fare increases in the quarter, of which six were matched by competitors, as well as dozens of international and "tactical" increases.

The company ended the quarter with an unrestricted cash balance of $3.6 billion, and a restricted cash balance of $900 million, for a total of $4.5 billion. Unrestricted cash and short-term investments increased by $1.8 billion during the quarter as the company drew down $2.8 billion of financing related to its exit from bankruptcy.

UAL says it expects to boost systemwide capacity by 3% for the second quarter and the year, with the lion's share of those gains coming at the regional affiliate airlines. UAL says it expects fuel to cost $2.15 a gallon for the second quarter and $2.06 for the year. It has no fuel hedges in place.