UAL profit flies past estimates; Higher fares, fuller airplanes get credit

Fuller planes and significantly higher ticket prices helped United Airlines parent UAL Corp. report a stronger-than-expected 76 percent jump in third-quarter earnings Tuesday, news that sent the company's stock up 7 percent.

The carrier's "excellent results," Chairman and Chief Executive Glenn Tilton told UAL employees in a message, were "driven by fundamental improvements across our core business."

Tilton sounded the same upbeat theme in a conference call with Wall Street analysts. While the carrier is "continuing to focus on controlling our costs," he said, United's improving performance, as evidenced by the latest quarter's results, has "put us in a position to look to our future with confidence."

UAL officials also indicated that the holding company is moving ahead with its previously disclosed review of the possible divestitures of its maintenance business and United's Mileage Plus frequent-flier program.

Like its rivals in the higher-cost legacy airline group, United faces unrelenting competitive pressure from low-cost, no-frills carriers such as Southwest Airlines. In December 2002, those pressures pushed UAL into bankruptcy protection, from which it emerged in February 2006.

In response, UAL has adopted a variety of dramatic and often painful cost-cutting measures. Earlier this year, in a reflection of what the company has called its "commitment to capacity discipline," United trimmed back its domestic route structure, lowering North American carrying capacity by 4.6 percent.

At the same time, United has expanded its international operations, which generate better profit because they face little competition from low-cost airlines.

The most positive single factor, however, has been a solid increase in the price United and other airlines have been able to charge passengers.

The result, despite the drag of higher jet-fuel costs, has been a major profit upturn on a relatively minor increase in revenue for UAL and for such competitors as Delta Air Lines Inc. and American Airlines parent AMR Corp.

United will likely be "dialing back" its U.S. route capacity again in 2008, the company said, and further bolstering its international routes.

In the latest quarter, UAL's net income was $334 million, or $2.21 a diluted share, up from the year-ago quarter's $190 million, or $1.30 a share, on fewer shares. Thanks to hedging and the reduced route structure, United's fuel costs declined 3.2 percent, to $1.32 billion, and labor costs stayed flat at $1.06 billion.

Excluding special items, UAL would have earned $1.96 a share, a less robust performance than its net income but still significantly above the $1.88 a share that analysts had been forecasting. Revenue rose just less than 7 percent, to $5.53 billion.

Profits were bolstered because United's aircraft were flying with more passengers aboard, which produced what UAL noted was a per-seat profit increase "that was among the best in the industry."

United's revenue per available seat mile, an industry yardstick that measures operating costs against capacity, rose a solid 9.7 percent on company-operated flights.

Under questioning from analysts, UAL officials offered a limited update on the progress of the company's plans to explore the sale or spinoff of its maintenance group and its mileage program.

"We are further along in developing the possibility of the [maintenance group] transaction than we are with Mileage Plus," Tilton told analysts.

Chief Financial Officer Jake Brace said the company is in contact with a number of private-equity investors, as well as possible "strategic buyers," which means companies that provide aircraft-maintenance services might want to add UAL's big San Francisco-based operation.

UAL might have the outlines of a deal to present to its workforce by late this year or early in 2008, Brace said.

As for the Mileage Plus operation, officials said United is working on finalizing an independent profit-and-loss format that will let it better gauge the frequent-flier program's profitability and its prospects as an independent business.

UAL stock climbed $3.36, to $51.49, on the Nasdaq stock market.

Graphic: Fewer passengers but more revenue %% UNITED'S THIRD QUARTER 2006 2007 CHG. Revenue ($B) $5.18 $5.53 6.8% Net income $190 $334 75.8% ($M) Passengers 18,126 17,804 -1.8% Load factor 83.1% 84.0% 1.1% Fleet size 750 742 -1.1% Available 41.2 mil. 40.7 mil. -1.2% seat miles %% Source: United

Chicago Tribune