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.



United also is restructuring its Tokyo Narita operations. It has dropped Seattle-Narita; dropped Narita to Bangkok, Taipei and Hong Kong and down-gauged Tokyo-Seoul. The aircraft are moving to new routes such as SFO-Taipei as well as Houston-Munich, which began Thursday.

Going forward, United will rely more on partner ANA at Narita, Compton said. ANA re-timed its flights from Narita to Bangkok and Jakarta, improving connections for United passengers. In the current quarter, United expects connections on ANA to increase by 30% from the same quarter a year earlier.

As for Delta, first-quarter results in Asia provide one more example of how this is a time when everything seems to be going right.

"One bright area in the Pacific portfolio has been China, with all of our China market showing year-over-year unit revenue gains despite a 15% capacity increase," Bastian said. One advantage: The big three Chinese carriers are all members of the Skyteam Alliance, which enabled Delta to benefit from "continuing to work with our Chinese partners on improving our connectivity and our schedules to interior China," Bastian said. Delta also secured better slot times in Beijing, he said.

American said its Pacific PRASM grew 9%, but President Scott Kirby stressed on the American earnings call that comparisons are not meaningful. He said American's presence in China is small, so that it benefitted disproportionately from improved slot times, as well as from increased share.

In the first quarter, United suffered in China from two harsh realities. One is that this appears to be Delta's time in the airline business, in China as well as elsewhere. The other is that it's always tough to be number one, which provides so much more opportunity to disappoint.

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

Follow @tedreednc

More from Stocks

12 Stocks That Make Up the GLUM Index

12 Stocks That Make Up the GLUM Index

REPLAY: Jim Cramer on Tariff Worries, Oil, Alphabet and Centene

REPLAY: Jim Cramer on Tariff Worries, Oil, Alphabet and Centene

Worth a Stunning $6.6 Trillion, Tech Stocks Have Taken Over the Market

Worth a Stunning $6.6 Trillion, Tech Stocks Have Taken Over the Market

Video: Athens Stock Exchange CEO on What's Next for Greece's Debt Woes

Video: Athens Stock Exchange CEO on What's Next for Greece's Debt Woes

Here's Why Snap Shares Climbed Monday

Here's Why Snap Shares Climbed Monday