Largest profit in 7 years for United; Cost cuts, summer demand bolster airline's finances

United Airlines soared to its largest quarterly profit in seven years, a testament to how far the once-beleaguered carrier has come since its 38-month bankruptcy.

The Chicago-based airline pinned its $274 million profit on continuing cost cuts, solid summer demand, a rush of last-minute bookings and capacity changes that helped bolster profits from international flying.

"Our results this quarter are all about performance, and these results will continue to improve," Glenn Tilton, United's chief executive officer, said in a message to employees.

United posted huge losses for years as it trudged through the longest bankruptcy in U.S. airline history. It emerged in February 2006 after cutting more than $7 billion in costs.

In this year's second quarter, which ended June 30, United reported net income of $1.83 a share, compared with $119 million, or 93 cents a share, for the year-ago period. It's the company's highest true profit since the second quarter of 2000, when United made $408 million.

Revenue climbed to a record $5.2 billion.

A financially strong United is good for its second-largest hub in Denver, where the carrier employs 5,250.

United said earlier this year that its profits in Denver had eroded because of heavy competition, particularly with the arrival of Southwest Airlines. But executives said the situation has leveled out in recent months.

"It's clearly a much more competitive market over the last year, but our revenue performance - I think it's fair to say - has stabilized there," said John Tague, United's chief revenue officer. "On balance we're pleased with how we've competed effectively and protected our customer base."

Although the second quarter is typically one of the industry's strongest, United's results handily beat expectations. Analysts surveyed by Thompson Financial estimated earnings of $1.39 a share on revenue of $5.15 billion.

Other highlights:

* Cash and short-term investments rose by $895 million.

* Operating margins doubled, hitting 10.3 percent, as operating expenses fell by $177 million.

* Interest expenses dipped by 34 percent in the quarter through refinancing of debt, including Denver municipal bonds.

* Passenger revenue rose 4 percent, fueled by a 16 percent increase on the international side.

Morningstar analyst Brian Nelson in Chicago said he was impressed by United's free cash flow, which rose 55 percent, compared with the year-ago period. Free cash flow equals operating cash flow minus capital expenditures.

"It was a very nice quarter," Nelson said. "They're running the business to generate cash, and they're doing a good job on that front."

Since emerging from bankruptcy, United's primary strategy has been to create distinct services and products for different types of customers. As part of that move, United announced Monday that it will upgrade the business cabins on its international flights.

The upgrade includes taking several seats out of the business cabin to make room for seats that recline 180 degrees. It also will add more seats in economy on most of those planes.

Some observers are speculating that, with plenty of cash on hand, the company might initiate a stock buyback. United executives said Tuesday that they are still exploring the best use of that cash.

The more United earns, the more vocal its employee groups become about wanting to renegotiate labor contracts. United workers took two pay and benefit cuts while the carrier was in bankruptcy, and the carrier terminated its pension plans.

"A corporation that ignores the needs of its workers is doomed to failure," the Association of Flight Attendants wrote in a release Tuesday. "United Airlines has great opportunity to soar. Profits must be invested in its employees."

United says it has ongoing conversations with its unions and notes that the current agreements cannot be changed until 2010.