Skift Take

In the previous Jeff Smisek reign, United fell far behind some of its competitors in profitability. But that's beginning to change — slowly.

United Airlines said Tuesday it posted its best annual on-time performance in 2016, but its overall profits and margins continue to lag Delta Air Lines, the most profitable U.S. carrier.

United, which released financial results after markets closed, reported net income of $2.3 billion for 2016, with a pre-tax margin of 10.4 percent. For the fourth quarter, generally not the strongest period for U.S. airlines, United reported net income of $397 million, with a pre-tax margin of 9.8 percent.

In the past few years, United’s margins have been of some concern for investment analysts, who have noted as the airline has repeatedly failed to match Delta’s profitability. Delta told analysts last week that its full-year 2016 operating margin was 16.5 percent. Its full-year, pre-tax adjusted net income was $6.1 billion

As recently as 2011, United had higher margins than Delta, according to data compiled by Hunter Keay, an analyst at Wolfe Research. But the company struggled with integration after its merger with Continental Airlines, leading to a margin gap with Delta and other U.S. carriers. Now under new management — President Scott Kirby, CFO Andrew Levy and Chief Commericial Officer Julia Haywood all joined the company late last year in addition to CEO Oscar Munoz — United is starting to make some improvements.

Analysts have been more bullish on United after the airline in November shared a multi-year plan to improve net income and margins. The company laid out strategies to increase earnings by $3.9 billion between 2017 and 2020. The airline plans to improve its revenue management systems, cull unprofitable flights, “enhance” its MileagePlus program, add larger jets, and reduce costs.

It also plans to better segment its cabins, adding new products like Basic Economy, in which customers will give up typical perks — like the right to bring large carry-on bags — in exchange for cheap fares.

“[United] is the most intriguing stock in our coverage given management’s bold plans to beat [Delta] on margins by 2020,” Keay wrote on January 10. “Very few expect that will happen. But the sensitivity to improvements in fundamentals has a big impact on valuation.”

United is on solid ground

United may not be able to match Delta yet, but the Chicago-based airline is doing fine on most financial and operational metrics.

In a statement, Kirby said United “saw meaningful improvement in the pricing and demand environment,” in the fourth quarter, and the airline’s revenues grew slightly for the quarter, year-over year. The airline said late bookings in November and December were stronger than expected.

In addition, one key measure of revenue may soon trend upward, United said. Analysts watch a metric called passenger revenue per available seat mile, or PRASM, which calculates how much money an airline makes for each passenger it flies on mile. At every airline, PRASM has been trending down for a year or more, as industry capacity has grown faster than demand in many markets. Airlines have been discounting fares, and that puts pressure on PRASM.

But United’s PRASM decreased only 1.6 percent in the fourth quarter, year-over-year. And for the second quarter, United predicted PRASM might grow slightly, year-over-year. Delta has also said its PRASM also might turn positive this quarter.

Operationally, United said it continues to improve. In addition to what it said was its best-ever on-time rate in 2016, United said it had the fewest cancellations, delay minutes and mishandled bags in its history.

But matching that won’t be easy in 2017, as United is expected to increase its aircraft utilization and remove some slack from its schedule. United told pilots recently it will fly its Boeing 737s and Airbus A320 family aircraft more in 2017 than in 2016.


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Tags: airlines, delta air lines, united airlines

Photo credit: United is focused on improving its margin gap relative to Delta. United Airlines

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