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United Airlines (UAUA)
Analysis
Data
Financials
     Table of Contents      
Intro and Overview
     Introduction
     Business Overview
Analysis and Trends
     Financial Analysis
     Key Trends and Forces
Competition

Financial Analysis

UAUA 2008 Performance
2007 2008
Total Revenue ($millions) 20,143[1] 20,194[1]
Net Income ($millions) 403[1] (5,348)[1]
Revenue Passenger Miles (RPMs) 117,399[1] 110,061[1]
Available Seat Miles 141,890[1] 135,861[1]
Load Factor 82.7%[1] 81.0%[1]
Passenger Revenue per Available Seat Mile (PRASM) $10.78[1] $11.29[1]
Operating Expense per Available Seat Mile (CASM) $11.39[1] $15.74[1]
Aircraft in Operating Fleet 739[2] 689[2]


United earned $20.194 billion in revenue in 2008, a 0.3% increase from 2007.[3] This increase was attributed mainly to slight fare increases as well as 6.9% increase in yield, or mainline passenger revenue excluding industry and employee discounted fares per RPM, to 13.89¢.[3] However, United, much like other airlines, reduced its capacity, or Available Seat Miles (ASM), by 4.2% to 135,861 million during 2008 because of slumping consumer demand for travel and increases in operating expenses, most significantly fuel.

To combat increases in fuel prices, UAUA enters into fuel hedge agreements, hedging about 50% of their fuel needs in 2008.[6] However, United secured its fuel at $104/barrel and as a result, posted losses of $779 million and $370 million in Q3 and Q4 2008 as oil prices plummeted.[6][7] Furthermore, United has hedged about 25% of its fuel for 2009 at an average of $101/barrel which will lead to more losses unless oil spikes in 2009.[6]

After a $2.740 billion net loss in 2Q08, UAUA posted a modest profit of $28 million in 2Q09. Still, operating revenue fell by 25.2%, and more specifically, passenger revenue from the United Airlines segment fell by 28.2%.[8] However, operating expense declined by 51.5% between 2Q09 and 2Q08, led by a 61.7% drop in fuel expense through the company's operations, as average price per gallon fell from $3.31 to $1.41.[8] Nonetheless, the reduced demand from the recessionary environment is reflected in a 9% and 17.2% decline in ASMs and Passenger Revenue per ASM (PRASM), respectively.[8]

UAUA posted a $57 million loss in 3Q09, though this reflects a $735 million improvement as compared to 3Q08.[9] While revenue fell by over 20% to $4.433 billion in 3Q09, UAUA was nonetheless able to decrease its operating expenses by over 28%, resulting in operating income of $88 million.[9] In particular, the company benefited from falling oil prices, as airline fuel expense decreased by 57.8% between 3Q08 and 3Q09 to $1.06 billion.[9] UAUA's current ratio of 0.68 and debt to asset ratio of 1.14 illustrate the company's large debt load. Further, despite decreasing ASM by 5.7% in 3Q09 in response to lower demand, the company's PRASM fell by 14.7%.[9]

Business Segments

Mainline Services (80.6% of Revenue[10])

United's mainline services operated 409 aircraft in 2008, serving destinations within the U.S. and Canada (domestic) as well as in Europe, Asia and Latin America (international).[2] In 2008 mainline services provided $17.1 billion in operating revenue for UAUA[11], a slight increase from $17.0 billion in 2007[12] United earned 57% of its revenue from its domestic operations in 2008, with the remaining revenue coming from its international operations which are broken down into the Pacific, Atlantic, and Latin American regions.[12] Overall, the mainline services produced about 135.8 million Available Seat Miles (ASM) in 2008, a 4.2% decrease from its 141.9 million ASMs in 2007, as the company reduced its capacity because of higher operating costs and decreased demand.[12] On June 4, 2008, United announced its cancellation of its "Ted Airlines", which was the company's attempt to enter into the budget airline sector.[13]

Alliances

United generates revenue through agreements with other airlines, primarily under its Star Alliance program, the largest airline network in the world serving 900 destinations worldwide in 159 countries with over 16,500 daily flights.[14] Some features of United's alliance agreements include shared frequent flier programs, code sharing of flight operations, coordination of reservations, ticketing and baggage handling. Under code sharing agreements some seats of one carrier's flight can be marketed and sold under the brand name of another carrier. Some key partner airlines include Air Canada, Air China, Lufthansa, and US Airways Group (LCC).[14]

United Express (14.6% of Revenue[10])

The United Express segment earns revenue through flights operated by third party carriers under contract. These carriers include SkyWest Airlines, Mesa Airlines, Colgan Airlines, Chautuaqua Airlines, Shuttle America, Trans State Airlines, GoJet Airlines and ExpressJet Airlines. In 2008, UAUA earned $3.1 billion in revenue from its United Express operations, the same as in 2007, with a fleet of 280 aircraft.[12] Under their contracts with these carriers United pays contractually agreed fees for operating the flights; in return United determines the pricing, revenues, inventory and schedules for flights operated by these carriers. United Express is typically operated by smaller aircraft between smaller airports and United's hub airports. In 2007, United Express produced about 16.2 million Available Seat Miles (ASM), unchanged from a year earlier.[12]

United Cargo (4% of Revenue[10])

United also offers cargo services for both domestic and international shipping. Freight shipments accounted for 85% of the cargo segment's volume in 2008 with mail shipments accounting for the remaining 15%.[15] In 2008 Cargo generated $854 million in revenue, an 11% increase from 2007.[16]

United Services and Other (0.8% of Revenue[10])

United Services is an airline support business that provides maintenance and repair services globally. In 2008 United generated $167 million in third party revenue, a decrease of 8.7% from 2007[17]. Furthermore, UAUA also sells jet fuel through its subsidiary United Aviation Fuels Corporation, which earned approximately $1.1 billion in revenue in 2007.[18]

Key Trends and Forces

Fuel Costs

Like other airlines, fuel costs are United's largest operating expense, accounting for 26.2% of the company's total operating expenses in 2007.[3] Furthermore, United's fuel prices have steadily increased, with its average cost per gallon climbing from 94 cents in 2003 to $2.18 in 2007.[3] Additionally, as oil has inched up past $120 a barrel in early 2008, fuel costs accounted for over 57% of United's operating expenses in Q1 2008.[19] Although United routinely hedges its oil, rising oil prices still caused United's fuel costs to skyrocket in 2008- United is paying $2.81 per gallon of fuel in Q4 2008.[20] Additionally, higher fuel costs led to a 31% increase in United's Cost per Available Seat Mile (CASM) in Q3 2008.[21]

Because of increasing oil prices, United entered into hedging agreements for its fuel at an average $104/barrel in 2008 and $101/barrel in 2009.[6] However, oil prices have dropped significantly since its peak in Q2 2008, reaching about $37/barrel in December 2008.[22] As a result of declining oil prices, United now faces the other harm of volatile oil prices- overvalued hedging contracts. In Q3 2008, for example, United posted a $779 million loss because of devalued hedging contracts.[20] Moreover, United has already secured about 25% of its 2009 fuel needs in hedges at around $101/barrel.[6] Unless oil prices climb back up, United will face more losses into 2009 as its hedging contracts lock the company into fuel prices much greater than market value.

Merger Talks

United has been the topic of many merger rumors since mid 2007. Now that Delta and Northwest have merged some claim that this could be a major catalyst for further consolidation in the industry.[23] Mergers within the airline industry can be beneficial to carriers in that they can claim a significant market share advantage and scale their operations to be more efficient. Furthermore, through a merger companies with different traffic and route patterns can increase their exposure to major domestic routes while cutting down the number of flights that compete with each other. In a major blow to United, Continental backed out of a nearly complete merger arrangement after seeing United's worse than expected Q1 2008 earnings.[24] The next candidate was US Airways, and talks began immediately following the Continental misstep.[25] However, after nearly two months of negotiations, the merger fell through. Sources have cited possible labor union opposition and high integration costs as deterrents for the merger.[26]

Declining Consumer Demand and Failed Ted Leads to Drop in Growth

Because of the 2007 Credit Crunch and global recession, consumers worldwide are cutting their demand for travel. Furthermore, consumers that are traveling are gravitating increasingly more to low-cost alternatives like Southwest Airlines Company (LUV). In 2007, United reduced its capacity or Available Seat Miles (ASM) by about 1% because of slumping consumer demand for travel.[3] Additionally, in Q3 2008, United reduced its capacity by 3.6% and its load factor dropped by 1.6% as consumers traveled less.[27] Conversely, low-cost operator Southwest increased its ASMs by 7.5% in 2007, although it plans to cut capacity in 2009.[28] United's attempt to capture budget airline travelers, its Ted Airlines, was cancelled in June 2008, thus causing UAUA to scale back its capacity even further as travelers seek lower airfares. Overall, United expects to reduce its capacity by about 11% in 2008, with an additional 8.5% reduction in ASMs in 2009.[21] (Read more on competition...)


Introduction and Overview | Analysis and Trends | Competition

References

  1. ↑ 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 UAUA 2008 10-K, Item 6, pg. 36
  2. ↑ 2.0 2.1 2.2 UAUA 2008 10-K, pg. 28
  3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 UAUA 2008 10-K, Item 6, pg. 36
  4. ↑ Bureau of Transportation Statistics. Fourth-Quarter 2008 System Airline Financial Data
  5. ↑ UAUA 2008 10-K, Item 7
  6. ↑ 6.0 6.1 6.2 6.3 6.4 "Details on United’s Fuel Hedges" Bnet.com 10/24/2008
  7. ↑ "Hit by Downside of Low Fuel Prices, United Looks for Cash" WashingtonPost.com 11/26/2008
  8. ↑ 8.0 8.1 8.2 UAUA 2Q09 10-Q
  9. ↑ 9.0 9.1 9.2 9.3 UAUA 2009 3Q09 10-Q
  10. ↑ 10.0 10.1 10.2 10.3 UAUA 2008 10-K, pg. 121
  11. ↑ UAUA 2008 10-K, pg. 46
  12. ↑ 12.0 12.1 12.2 12.3 12.4 UAUA 2008 10-K, Item 1, pg. 6
  13. ↑ "United Airlines to shut down Ted, cut jobs" LATimes.com 6/4/2008
  14. ↑ 14.0 14.1 UAUA 2008 10-K, Item 1, pg. 8
  15. ↑ UAUA 2008 10-K, Item 1, pg. 6
  16. ↑ UAUA 2008 10-K, pg. 46
  17. ↑ UAUA 2008 10-K, Item 1, pg. 4
  18. ↑ UAUA 2007 10-K, Item 7, pg. 39
  19. ↑ UAL Press Release
  20. ↑ 20.0 20.1 "Hit by Downside of Low Fuel Prices, United Looks for Cash" WashingtonPost.com 11/26/2008
  21. ↑ 21.0 21.1 UAUA Q3 Earnings Press Release 10/21/2008
  22. ↑ "Airline shares rally as oil prices fall to 2004 levels" MarketWatch 12/18/2008
  23. ↑ www.Streetinsider.com
  24. ↑ http://www.nytimes.com/2008/04/28/business/28air.html?_r=1&oref=slogin
  25. ↑ http://www.reuters.com/article/businessNews/idUSN2849124520080428?feedType=nl&feedName=usbusinessafternoon
  26. ↑ http://www.reuters.com/article/businessNews/idUSWEN598820080530?feedType=nl&feedName=usbeforethebell
  27. ↑ "UAL Corporation Reports Third Quarter 2008 Results" Bnet.com 10/21/2008
  28. ↑ Southwest Wikinvest Page
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