United Continental Holdings Inc (UAL) on the Move: A New Strategy?

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However, under the new terms of its aircraft orders, United will delay some capital spending and get more use out of the planes in its fleet today. Whereas United’s capital commitments had previously peaked at $3.0 billion in 2016 before dropping off slightly to $2.5 billion in 2017, the company now has $2.4 billion in capital commitments for 2016 and just $1.4 billion in 2017. Capital spending will now ramp up in 2018, and some of the aircraft ordered last week will not be delivered until as late as 2024.

So what?
It’s not immediately clear whether or not last week’s deals reflect a conscious change in United Continental Holdings Inc (NYSE:UAL)’s strategy. One possibility is that United is only pushing back aircraft deliveries because the larger airplanes will not be available until 2018 and thereafter. Indeed, United will be one of the first customers for the 787-10, and the A350-1000 is not expected to enter service until 2017.

On the other hand, it is possible that United was actively looking to push back some of its capital spending. On several recent occasions, the company’s management has talked about moving to a balanced capital allocation policy, which would include smoothing out capital expenditures over time. United’s recent transactions will improve free cash flow generation for the next several years, while allowing the company to gradually replace older aircraft with more fuel-efficient models.

Slow progress
I am still concerned about United Continental Holdings Inc (NYSE:UAL)’s massive capital commitments — the $23.6 billion already committed works out to an average of $2 billion per year for the next 12 years — but last week’s transactions definitely seem like a step in the right direction. United now has a few more years to improve its profitability and cash flow in order to support these heavy investments. Yet, Delta Air Lines, Inc. (NYSE:DAL) still seems like a more attractive investment due to its superior profitability and cash generation.

The article United Airlines on the Move: A New Strategy? originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and long Sep 2013 $33 Puts on United Continental Holdings. The Motley Fool recommends Embraer-Empresa Brasileira.

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