United Continental Holdings Inc (NYSE:UAL), the nation’s largest passenger air carrier in terms of revenues, just closed out a year when it earned $1.78 a share excluding one-time charges mostly stemming from merger integration. Certainly, UAL continues to combine its October 2010 Continental Airlines purchase into operations. This year should bring a reduction in merger-related costs, as well as a boost to synergies. Given this backdrop, if the air travel environment is favorable and fuel costs remain stable, it may be destined for a strong 2013. UAL shares could potentially ascend further from its recent 52-week high as it pursues an ongoing efficiency strategy.
Management is now looking to achieve between $1 billion and $1.2 billion in annual revenue and cost synergies from the Continental merger, $650 million of this amount having been realized in 2012. It is possible that the total planned amount will come to fruition in 2013, but some will likely spill into 2014. That said, through the optimization of the two airlines’ combined networks and bringing together of their operations to cut expenses, profitability ought to improve somewhat. The merger should thus be seen as a positive for the company and industry as a whole.
Similarly, I would refer to Delta Air Lines, Inc. (NYSE:DAL) and its 2008 buyout of Northwest Airlines. In the years subsequent to the deal, Delta’s productivity improved significantly, as it pared down the sizable aircraft fleet and altered its route network. Delta earned a $1.85 profit in 2012 and its shares have soared considerably since mid-November.
Keeping Capacity in Check
Even more so than Delta, UAL has aimed to boost its seating occupancy (load factor) by maintaining available capacity at a profitable level. Available seat miles declined slightly in 2012, and plans are for a 1.5% decrease in that metric this year. As a result, the average airfare, up 2% in 2012, may well increase further on lower seating supply.
UAL intends to cut its fleet count by 10 aircraft this year while also replacing 26 aircraft. More importantly, it will probably continue to increase the profitability of its total system. Along with cutting service in some markets, it will in fact add numerous international flights and eight new domestic routes. In all, the carrier will likely better match capacity with demand while flying a larger number of lucrative routes and is substantially less apt to incur large net losses than in previous decades.
The United Continental Network
UAL’s breadth includes nine domestic hubs, including at airports in Los Angeles, Chicago, Houton, and Washington D.C, whereas in the past the largest airlines would operate with half that many hubs. It can thus accommodate passengers on more routes than ever. Furthermore, alliances with overseas-based carriers contribute to its service, as well.
What differentiates the company for one is its higher proportion of Pacific-based revenues. It has long served Japan, and China is now becoming a source of heightened yields. As such, UAL’s outlook is partly dependent on economic conditions in that region, more so than other major carriers.