United Continental fourth-quarter profit tops estimates, then shares fall

Key Points
  • United's revenue for each seat it flew a mile rose 0.2 percent, up from a previous forecast of no growth year over year.
  • The company's shares are up more than 15 percent this year but fell during the airline's investor call on Tuesday.
  • The airline forecast earnings per share of between $6.50 and $8.50 for 2018.
United Airlines sinks, is a capacity war coming?

United Continental Holdings, the parent of United Airlines, posted earnings Tuesday that outpaced analyst estimates. But shares plunged in post-market trading during a long-awaited investor presentation in which the airline unveiled a strategy to add more seats to the market while keeping a lid on costs.

Some analysts appeared unconvinced that the plan would help expand margins.

The presentation was a chance for CEO Oscar Munoz and other top United brass to impress investors, who had dumped shares after executives on a tense earnings call last quarter gave a fuzzy picture of its costs and other metrics for 2018.

The company did post better-than-expected results for the fourth quarter of 2017: $1.40 per share on an adjusted basis. Wall Street analysts polled by Thomson Reuters were expecting earnings of $1.34 per share.

The airline has struggled to increase the amount of revenue it brings in for each seat it flies a mile, a key industry metric. But this rose 0.2 percent in the fourth quarter from the year-earlier period, slightly beating a previous forecast of flat per-seat revenue.

United said its fourth-quarter revenue totaled $9.44 billion, up 4.3 percent on the year and higher than Wall Street forecasts of $9.42 billion.

The airline reported net income of $580 million in the quarter, up 46 percent on the year.

Like its competitors, United is facing higher jet-fuel bills, as the cost of oil climbs. In the fourth quarter, its fuel costs rose 18 percent from a year earlier to $1.89 a gallon.

But during the investor presentation, shares fell more than 6 percent in post-market trading, as the airline forecast a 4 percent to 6 percent growth in capacity. Strong growth in seat counts coupled with modest increases in revenue could challenge United just as it faces higher costs, such as fuel.

The presentation took another tense turn with some analysts.

"I hate to be critical two earnings calls in a row here," said Brandon Oglenski, a transportation analyst at Barclays. "A lot of folks won't buy your stock because the belief is we're on a long-term trajectory to just dilute margins and take profits right back to break even."

Oglenski said the plan might make the airline perform worse than competitors "in what is a very robust economy."

Munoz responded that the airline is "very confident and focused" on keeping costs down and that "we don't ... provide numbers that are may be too high and we lose confidence."

The airline forecast earnings per share of between $6.50 and $8.50 for 2018. For comparison, it posted $7.02 a share in 2017.

"Just so we're clear, the number is 8.50 on that chart on the far range of EPS is the correct number," Munoz said.

United unveiled other initiatives to increase revenue, including expanding its no-frills basic economy class and allowing those passengers to pay to select their seats. It is also introducing a premium economy class, which offers travelers a larger seat, more legroom, an amenities kit and other perks.

To cut costs, the airline even started printing its in-flight magazine, Hemispheres, on different paper to make it one ounce lighter, allowing United to save 170,000 gallons of fuel a year, or $290,000 at current fuel prices, according to a recent note to employees. It also told employees that it has eliminated duty-free products and reduced the amount of orange juice it carries on board for some flights.

A sunnier revenue forecast from United earlier in January encouraged investors to change their tune about the company's stock. United shares rose more than 15 percent this year as of Tuesday's close, more than U.S. rivals Delta and American. United shares fell more than 7 percent last year, while the stock of its larger competitors rose.