United's Numbers Improving

UAL Corporation (UAUA - Analyst Report), the parent company of United Airlines, reported a third quarter loss of 43 cents per share, better than the Zacks Consensus Estimate of a loss of 93 cents. This compares favorably with the loss of $1.99 per share reported in the year-ago quarter. Results were heavily influenced by a sharp drop in fuel prices and more aggressive management of other costs.

Revenues fell 20.3% year-over-year to $4.4 billion as a result of a 14.7% year-over-year decline in mainline revenue passenger miles (RPM) and a 17.1% drop in yield. The revenues were also disproportionately hurt by the decline in premium and business travel. UAL was able to offset much of this by a $1.7 billion decrease in operating expenses, about 80% of which was related to fuel.

For the reported quarter, mainline load factor increased 260 basis points to 85.8%, and passenger revenue per available seat mile (PRASM) decreased 16.8% on an 5.4% decrease in traffic (RPM), a 8.2% decline in system capacity (available seat miles or ASM), and an 19.4% fall in yield (passenger revenue per passenger mile) relative to the year-ago period. Operating revenue per available seat mile (RASM) decreased 17.3% year-over-year to 11.15 cents.

Total operating expenses (excluding hedge gain and special items) for the quarter were $4.3 billion, down $1.7 billion, or 28%, versus third quarter 2008.

For the fourth quarter, UAL forecasts mainline capacity reduction of 6-7%, and of 3.2-4.2% on a consolidated basis. The company expects scheduled debt and capital lease payments of $215 million and capital expenditures of approximately $70 million for the quarter.

For 2010, UAL has hedged 16% of its estimated fuel consumption at an average of $74 a barrel. Excluding fuel and profit sharing, mainline CASM is expected to decrease 0.0-0.5% for the full year 2009.

While we expect United to benefit from capacity cuts and lower fuel costs, we are increasingly concerned about the impact of competitive pricing pressures on the bottom line. Thus we maintain a Neutral rating on the shares.