Executives at United Airlines are dissatisfied with its revenue performance during the third quarter but they are confident that the carrier will return to a leadership position as its operations continue to improve.
The Chicago-based Star Alliance carrier had a "tough" July and August before recovering from operational issues in September, says chief executive Jeff Smisek during an earnings call today. Operational issues that carried over from the previous quarter included a lack of spare aircraft and the redeployment aircraft around its network.
"We had a tough summer but are back on track operationally," he says. "We have more work to do to secure United's leadership position."
United recorded $520 million in net income excluding special items during the quarter. This is down nearly 33% from $773 million in 2011. However, with $514 million in charges net income drops to just $6 million - a 99% drop from a year earlier.
Charges included a $454 million payment related to a joint collective bargaining agreement that the airline reached with its pilots in August. Smisek declines to comment on what these were but says that they are common for new labour agreements during the call.
Operating revenue declined by 2.6% to $9.9 billion while operating expenses rose 5.1% to $9.7 billion during the quarter compared to 2011.
Smisek says that United saw a slight decrease in business travellers as they shifted to other airlines during the summer months but that the numbers have begun to rebound. He likens the move to how one would find a detour when "your road to work is under construction".
"The road is repaired," he says, referring to United's operations.
Jim Compton, chief revenue officer at United, says that aircraft redeployment around its network - a key initiative to realise the benefit of the carrier's 2010 merger with Continental Airlines - slowed down during the third quarter in order to reduce stress on the system, during the call. He adds that the pace has since quickened and that the airline anticipates redeployment to be complete during the first quarter of 2013.
"We're confident that revenue synergies will accelerate in 2013," says Compton. United predicted $700 million to $800 million in revenue benefits from the merged network, he adds.
The Pacific was a revenue bright spot in United's network during the quarter. Passenger unit revenue grew by 9.9% year-on-year, led by an annual increase of 11% in China and 6% in Japan, says Compton.
China and Japan represent the majority of United's Pacific capacity, which includes a hub at Tokyo Narita.
Systemwide passenger revenue per available seat mile (PRASM) fell by 1.3% to 13.35 cents year-on-year. Domestic fell by 4.2% and international was flat.
United shifted capacity to meet demand during the quarter. Available seat miles were up 1% in the Pacific, including an 8% increase to Japan, while they decreased by 3.7% in the Atlantic compared to 2011.
"One of the most important benefits of our merger is the ability to reduce capacity in weaker markets and increase in stronger markets," says Compton.
Looking forward, one of the key things to gaining the revenue synergies of the merger are labour agreements. While United has reached an agreement with its pilots, it is still in talks with the unions representing its flight attendants, maintenance and other work groups.
"The longer this drags out the longer it may take to realise the full benefits of the merger," writes Ray Neidl, aerospace equities analyst at the Maxim Group, on joint labour agreements in a report today. "There appears to be some continuing concern as to when such a common contract can be initiated and when this benefit along with the merger will be realised."
United will continue its capacity discipline as costs increase in the fourth quarter. It anticipates that available seat miles (ASMs) will decline by 2.2% to 3.2% during the period compared to 2011, according to an investor update today. Domestic capacity will be down by 2.3% to 3.3% with international down by 2% to 3%.
ASMs will decrease by 1% to 1.2% for the full year.
Costs per available seat mile excluding various expenses including fuel are anticipated to increase by 3.5% to 4.5% in the quarter versus 2011. For the year, they are expects to increase by 2.7% to 2.9%.
United expects to pay an average of $3.31 per gallon for jet fuel in the fourth quarter and $3.28 per gallon for the full year.