’06 Operating Profit Fulfills United’s Plan

By Julie Johnsson, Chicago Tribune

Jan. 24–United Airlines’ parent reported its first annual operating profit since 2000 on Wednesday, but Wall Street didn’t cheer.

Shares of Elk Grove Township-based UAL Corp. slid 8 percent, to $44.81, after its fourth-quarter results fell short of analysts’ estimates and its executives cautioned that passenger revenue likely will rise at a slower pace this year than it did in 2006.

Investors also were rattled by a $2 jump in the price of crude oil and fears that other carriers would emulate American Airlines by selling additional shares, potentially diluting the holdings of existing stakeholders, said airline analyst Helene Becker of Benchmark Capital.

The sell-off in UAL stock, and the headlines that prompted it, were reminders that the airline business remains highly volatile, despite the progress that United and other carriers have made in improving their financial performance.

“The industry’s fundamentals and, importantly, United’s fundamentals, remain strong,” Glenn Tilton, United’s president, chairman and CEO, assured investors during a conference call.

United reported a net loss of $61 million, or 55 cents per share, for the fourth quarter, falling short of the 35-cents-per-share loss analysts had forecast.

The airline blamed the results on three winter storms that slammed its hubs in Denver and Chicago during December, forcing it to cancel 3,900 flights, including 900 flights at Chicago’s O’Hare International Airport, at a cost of $30 million.

Even so, United’s 2006 results were much improved. The airline reported an operating profit of $447 million, reversing a $219 million operating loss in 2005. The carrier posted net income of $22.88 billion for 2006, up from a net loss of $21.18 billion the prior year, but both of those numbers reflect massive special accounting gains and charges related to the carrier’s bankruptcy.

Analysts predict that United, American and other U.S. airlines will enjoy a strong 2007, posting cumulative profits of nearly $6 billion.

“2006 was obviously an inflection point. American Airlines posted its first profit since 2000, Continental saw its first profit since 2003, and United posted a pretty good profit of its own,” said Brian Nelson, equity analyst with Morningstar Inc.

But the carriers will have to keep a tight rein on expenses if they are to achieve their earnings potential, offset slowing revenue gains, placate investors and keep pace with competitors, analysts said.

United trimmed its workforce by 2,000 employees during 2006, including more than 1,000 salaried and management workers. And it has achieved $435 million of the $700 million in cost cuts that executives said they would implement by the end of 2007.

The airline also expects to pay off $1 billion of the debt it used to emerge from bankruptcy in February, saving about $5 million per month in interest, said Jake Brace, United’s chief financial officer.

Even so, the airline may be forced to cut deeper, analysts said.

Northwest Airlines and Delta Air Lines are expected to exit bankruptcy this year with lower cost structures than United, said Ray Neidl, airline analyst with Calyon Securities. “They’ve got to get [costs excluding fuel] down, as does American and Continental.”

One potential source of savings: labor costs, which rose 6 percent, to $4.27 billion during 2006, despite the layoffs.

United officials blamed higher benefit costs for the increase, as well as accounting rules that forced the airline to record about $159 million in expenses for the stock it awarded executives and employees.

That accounting expense will “go down quite significantly” in 2007, Brace said.

Another concern for analysts is that United Airlines isn’t likely to duplicate the 11 percent revenue gain it realized in 2006 by repeatedly raising prices and by achieving high load factors, a measure of the percentage of seats filled on its flights.

With most flights essentially sold out, United can’t jam significantly higher numbers of people on its planes. And United, like other airlines, can’t continue to raise prices indefinitely.

It remains to be seen whether United’s strategy of attracting passengers willing to pay more for better service will offset these trends, said CreditSights analyst Roger King.

“They haven’t proved it yet,” he said.

jjohnsson@tribune.com

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Copyright (c) 2007, Chicago Tribune

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