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United Looking for Financial Revival

BA DAL UAL

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United Continental Holdings Inc. (UAL - Analyst Report) has chalked out plans to overhaul its finances, as the airline behemoth has financially underperformed its domestic competitors in recent times. The news seems to have had a positive impact on shareholders as the stock price rose almost 4% on Tuesday’s trade on Nasdaq.

The Chicago-based company plans to reduce its annual costs by $2 billion by cutting fuel cost through more efficient planes. Further, United will also enhance its productivity by slashing sourcing cost, improving maintenance procedure and optimizing distribution channels.

The company is also concentrating on augmentation of ancillary revenues by $700 million to $3.5 billion by 2017, and expects to achieve this by offering new products to customers and increase fees on the current ones. United intends to use such measures to boost its pre-tax profitability by 2-3 % over the next four years and aims to return cash to shareholders by 2015.

We believe that the financial restructuring is an attempt by the company to console unsatisfied shareholders, who have been facing weak company performance over the last few quarters. However, it remains to be seen how well the company executes its plans, as it has lagged its peers in this regard over the last couple of quarters.

Recently, US Airways Group Inc. and American Airlines Inc, a subsidiary of AMR Corp. received clearance from Department of Justice for their proposed merger, which will create the largest global carrier. This in turn will increase competition for legacy U.S. carriers like United and Delta Airlines Inc. (DAL - Analyst Report).

Besides managing competitive threat, United also announced that it will reorganize some of it trans-Pacific and trans-Atlantic routes. The company will eliminate Seattle-Tokyo, Tokyo-Seoul flights, and introduce a second daily Houston-Tokyo flight. During restructure of its trans-Atlantic routes, United plans to launch new Houston-Munich, Washington-Madrid and Chicago-Edinburgh routes along with a New York-London flight during the peak summer season.

Similar to its policy in Europe, United is also expanding into secondary Asian markets to leverage from their growing trade flows and business activity. The company will add new routes from San Francisco to Chengdu and Taipei from the summer of 2014 on The Boeing Company’s (BA - Analyst Report) wide bodied aircraft.

Although the financial restructuring sound good for United’s shareholders, we believe the passengers could feel the pinch as they end up paying more in fees.

Currently United carries a Zacks Rank #3 (Hold).

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