United Continental Holdings Inc (NYSE: UAL) doesn’t just have airplanes in the air, the stock itself is taking flight today after the company reported its financial results for the second quarter. With all of the excitement brewing surrounding the financial results, some are starting to wonder if now is the time to get involved. Let’s dig in and find out:
UAL Reports Better-Than-Expected Earnings
The second quarter earnings results that were released by United Continental Holdings today were nothing short of impressive. The company reported $3.23 per share in earnings (exclusing non-recurring items which totalled $0.75 per share) which came in well ahead of analyst estimates at $3.7 per share. Not to mention the revenue growth.
During the quarter, UAL generated $10.777 billion in revenue, beating analysts expectations of $10.702 billion. The figure also showed gains on a year over year basis of 7.7%. Passenger revenues played a massive part in that growth, increasing by 8% and highlighting the strong demand the company has seen as of late. As can be expected, passenger revenue accounted for the bulk of the total revenue, representing 91.7% of the top line result.
Revenue Is Seeing Strong Gains On A Per-Seat Basis
The gains seen in revenue at United Continental Holdings can’t only be attributed to stronger passenger demand. The truth of the matter is that the company has increased prices, leading to more revenue per seat mile. In fact, consolidated passenger revenue per seat mile grew 3%. As of the most recent data, which was just provided today, for every mile a passenger is in a seat, the company generates $0.1387. Total revenue per seat mile increased by 2.8% to $0.1524.
Why Growing Revenue Per Seat Mile Is Important
Th truth of the matter is that airlines haven’t had it easy as of late. With increasing costs of fuel, they have been stuck in a tight spot, having to continually increase prices to keep up. Unfortunately, increasing prices tends to lead to poor consumer demand. However, UAL is showing that it is capable of maintaining a relatively strong rate of growth in revenue per seat mile, which gives it an ability to offset the rising cost per seat mile as a result of increasing fuel costs.
While fuel costs are leading to increasing operating expenses, which rose 12.2% to $9.616 billion in the second quarter, there is a silver lining. Consolidated unit costs per available seat mile, excluding fuel, third-party business expenses, profit sharing and special charges, declined 0.4% year over year.
Aside from the positive financial update, there was more positive news released with the earnings report. Like most mainstream airlines, United Continental is constantly looking to give its fleet an edge above the competition. During the quarter, the company announced that it plans on buying 25 new Embraer E-175 and four new Boeing 787-9 planes.
In the update, the company said that these planes not only feature the most modern facilities, they also bring additional seating capacity and better fuel efficiency to the table. UAL said that the Boeing 787-9 planes are expected to be delivered in the year 2020 while the E-175 jets will be delivered next year. Finally, the E-175 jets will be used to replace the current CRJ-700 airplanes in the fleet.
In terms of guidance, investors received yet another reason to be excited. United Continental said that it expects to expand capacity by between 4.5% and 5.5% in the third quarter while pre-tax margin is expected to stand between 8% and 10%. UAL also said that it expects for passenger unit revenues to increase by between 4% and 6% on a year-over-year basis. Finally, the company said that it predicts that consolidated costs per available seat mile with either remain flat or decline up to 1% on a year over year basis.
On a full year basis, capacity is expected to increase between 4.5% and 5%. The company said that it expects for adjusted earnings per share to come in between $7.25 and $8.75for the full year, up from the range between $7 and $850 that was previously reported. At the moment, analysts are expecting that earnings will come in around $7.70 per share.
Risks To Consider
First and foremost, before we get into the risks, I want to make one thing clear. This is just a customary section. At the end of the day, every investment comes with risk, even when the investment seems to be overwhelmingly promising. I believe that UAL is a promising investment, which we’ll get into in a bit. First, here is the one big risks to consider:
- Rising Costs – Fuel is one of the largest expenses that any airline faces, and the cost of fuel is rising. Therefore, airlines across the board are feeling the pain. Should the increase in the cost of fuel get out of hand, UAL could see declines.
Buy Or Stay Away?
When it comes to United Continental, I believe that the stock is a worth considering as a buy. While the airline industry is feeling the pain of increasing oil prices, UAL has done of good job of meeting the increasing costs with increasing revenue and showing growth in both the top and bottom line throughout the gains in oil. As such, I believe that this trend will continue. While the risk that oil costs will grow out of control, eventually putting a damper on demand, I believe that, at least in the near-term, the potential opportunity here outweighs the risk.