Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

United Continental Holdings Inc (UAL) Airlines: The Outlook Brightens (a Bit)

Last Thursday, United Continental Holdings Inc (NYSE:UAL) filed an investor update, providing some more insight into the company’s likely Q2 results. The update was generally positive from a revenue perspective, suggesting that United is seeing relatively good demand for the summer travel season. However, the analyst community still has unrealistically high expectations for United Continental Holdings Inc (NYSE:UAL), in light of the company’s unfavorable cost structure.

United Continental Holdings Inc (NYSE:UAL)

Revenue rises, but so do costs
The first piece of welcome news for investors was that passenger revenue per available seat mile (or PRASM, probably the most important measure of revenue in the airline industry) will increase between 0.3% and 1.3% for the quarter. That’s certainly not strong growth, but it implies that PRASM showed a solid 3%-4% increase in June after declines in April and May.

United Continental Holdings Inc (NYSE:UAL) also seems to be boosting non-ticket revenue. This consists of bag fees, change fees, and other optional passenger charges; “third-party business” revenue, such as maintenance work done for other airlines; and cargo revenue. These revenues totaled $1.17 billion in Q2 of 2012, but are forecast to rise to $1.30-$1.35 billion last quarter. This suggests that United Continental Holdings Inc (NYSE:UAL) is continuing to have success in diversifying its revenue sources.

On the other hand, unit costs (excluding profit sharing and third-party business expenses) are expected to rise 1.4%-2%, despite a $0.25 decline in jet fuel prices from $3.29 in Q2 of 2012 to $3.04 last quarter. In other words, non-fuel unit costs are increasing so quickly that it is overwhelming the effect of lower fuel prices. Furthermore, third-party business expenses rose from $60 million last year to an estimated $170 million in the same quarter this year (explaining much of the increase in non-ticket revenue).

The net effect is that United Continental Holdings Inc (NYSE:UAL)’s Q2 adjusted EPS will probably be pretty similar to last year’s $1.41 result; analysts currently expect EPS of $1.38. By contrast, Delta Air Lines, Inc. (NYSE:DAL) — which has led the major carriers in terms of profitability for the past year or two — is expected to post strong 35% growth in adjusted EPS. Delta Air Lines, Inc. (NYSE:DAL) is starting to realize the first cost savings from its $1 billion cost reduction program, and is making market share gains in New York, where it has invested a lot of money to grow its presence at LaGuardia and JFK Airports.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.