United Chops Flying Capacity Again

United Continental Holdings Inc. (UAL - Analyst Report) plans to further reduce the flying capacity through rest of the year owing to the higher fuel prices and sluggish economy.

The airline industry has been struggling with rising fuel costs and economic uncertainties. Moreover, the deepening European debt crisis has affected almost all the key global economies.

The company can reduce capacity by reducing flight frequencies, indefinitely postponing flights to certain markets and exiting less profitable markets. The company now expects to cut consolidated capacity by 2-3% during September to December. This is wider than the previous forecast of 1-2% for the fourth quarter. For fiscal 2012, United Continental expects capacity to fall 0.75-1.75% year over year.

Besides capacity cuts, United Continental is taking profitable actions to endure surging fuel prices and the ongoing market turmoil. Fare hikes and hedging strategies are the two effective tools to combat the situation. The company is successfully passing the increased fuel costs to customers in the form of fare hikes.

Further, United Continental is optimizing its network for greater efficiency in fleet operations. The company is reducing its domestic fleet count, retiring the older and less-efficient aircraft and reconfiguring domestic aircraft for international service.

The company’s overall initiatives are at par with the industry and its peers such as Delta Air Lines Inc. (DAL - Analyst Report) and Southwest Airlines Co. (LUV - Analyst Report), who are also struggling with the rising costs and the flagging economy.

The Zacks Consensus Estimate for United Continental’s 2012 earnings is pegged at $2.94, down from $3.71 over the last month. The estimate represents a substantial decline of 15.66% annually.

We currently have an Underperform recommendation on United Continental. For the short term (1-3 months), the stock also retains a Zacks #5 (Strong Sell) Rank.