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United Airlines profits more than double, sending shares up 5 percent

by Sirena Rubinoff
July 24, 2007

UAL Corp. reported its first profit in three quarters, with net income more than doubling from the second quarter of 2006, mainly due to lower costs and strong international operations.  Shares of the Chicago, Ill.-based parent of United Airlines surged 5.3 percent to $49.72 Tuesday.

Net income at UAL, which emerged from Chapter 11 bankruptcy protection in February, 2006, surged to $274 million for the quarter ending June 30, or $1.83 per diluted share, up from $119 million, or 93 cents per diluted share in the same period a year ago. 

Analysts far underestimated UAL’s performance for the quarter, forecasting an average of $1.39 per diluted share, according to Yahoo Finance. 

Revenue rose 2 percent in the quarter to $5.2 billion compared with $5.1 billion in the second quarter of 2006. 

“Their high international performance and ability to contain costs came in at better than what the street was expecting,” said Morningstar equity analyst Brian Nelson.

The company's two largest operating costs - aircraft fuel and employee salaries - both went down in the second quarter.  Aircraft fuel expense dropped 3.5 percent to$1.2 billion from $1.3 billion.  Salaries and related cost expenses dropped 4.9 percent to $1 billion from $1.1 billon.

UAL’s operating margin was 10.3 percent, more than twice the margin the company reported in the same quarter a year ago.

“Our second quarter results demonstrate solid performance momentum across the board,” said UAL president Glenn Tilton in the earnings press release.  “By successfully executing against our performance agenda we delivered record revenue performance and continued cost control.”

The company reduced its operating expenses by 3.6 percent to $4.7 billion, down from $4.8 billion a year ago.  It plans an additional $265 million of cost savings in 2007 to fulfill the $400 million cost reduction program announced last year.

UAL’s free cash flow, defined as operating cash flow less capital expenditures, increased by 55 percent to $956 million from the $618 million reported a year ago. 

 “Our strong operating cash flow is allowing us to pay down debt and make significant investments in the core business.  We generated strong free cash flow in the first half of 2007 and used it to reduce outstanding debt by about $1.5 billion so far this year, putting United in a solid position relative to our peers,” said Jake Brace, chief financial officer at UAL.

During a conference call with analysts Tuesday, company executives said they are "keeping our options open" in deciding what to do with the large amount of cash on the books.

“My thoughts are that management is going to be very prudent in their use of cash,” said Nelson.  “I don’t think United has reached the point where it can start buying back stock or implementing a dividend…Keeping the cash on the balance sheet is a good move.”

United Airlines emerged from Chapter 11 bankruptcy protection in February, 2006.

The average of analyst earnings estimates for UAL's third quarter is $1.62 per diluted share, and compared with $1.30 in the third quarter a year ago.