Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=86673
Story Retrieval Date: 8/28/2014 4:13:11 AM CST
United Airlines parent UAL Corp. posted a larger than expected loss in the first quarter due primarily to the rapidly soaring cost of fuel. The loss prompted the company to announce it was eliminating 1,100 jobs and sent shares plummeting $7.88 or 36 percent to close at $13.55.
UAL’s loss of $537 million, or $4.45 per share in the quarter ended March 31, was wider than its year-earlier deficit of $152 million, or $1.32 a share. Analysts had been expecting a loss of just $3.41, according to a survey by Bloomberg LP.
“This was obviously a very difficult and challenging quarter for us and for the industry,” United’s chairman, president and chief executive officer Glenn F. Tilton said in a conference call with analysts and investors Tuesday.
Revenues increased 7.7 percent to $4.71 from $4.37 billion, but were not enough to overcome a 51 percent increase in fuel costs. The company spent $1.57 billion on fuel in the first quarter, its largest expense.
Jamie Baker, an analyst with JPMorgan Chase & Co., wrote in a report that he considered UAL’s first quarter “to be disappointing.” Baker, who rates UAL as “underweight,” said he was nevertheless “impressed that the company is taking more aggressive steps than others in response to crushing fuel costs.”
Among the steps being taken by UAL is a reduction in the size of its 55,700-person workforce. The company plans to shed 500 salaried and management positions and 600 union-represented jobs through attrition, retirement and furlough.
The company is also further shrinking its 2008 domestic flight capacity by an additional 4 percent. United, which had already trimmed capacity by 5 percent during the fourth quarter of last year, said that by the final quarter of this year domestic capacity will be down approximately 9 percent year-over-year.
Part of the airline’s capacity reduction plans include retiring 30 narrowbody aircraft.
The combined measures are only the latest in a series of recent moves taken by the airline to generate more revenue. On Sunday, United announced it was raising the fee it charges customers to change tickets by one-third to $150. The airline has also begun to charge economy passengers $25 to check a second bag.
Steps such as the second-bag fee are “just the tip of the iceberg,” John P. Tague, executive vice president and chief revenue officer at United, said during the conference call.
“It’s uncertain … whether these moves will be enough to ensure survival during these turbulent times,” Brian Nelson, an analyst with Morningstar Inc. wrote in a report. Nelson added that he expects “UAL’s $2.9 billion unrestricted cash balance to face heightened pressure in coming periods, particularly if crude oil continues to march higher.”
In the last 12 months the price of crude oil, from which jet fuel is refined, has surged 88 percent to $119 a barrel.
Tilton cited the cost of fuel as one reason for United to pursue consolidation. Delta Airlines Inc. announced plans last week to acquire Northwest Airlines Corp., and many industry experts believe United will soon make a push to merge with either Continental Airlines Inc. or US Airways Group Inc.
“Oil at over $110 a barrel does not alone make the case for consolidation in this industry,” Tilton argued. “It simply makes it more compelling, as does increased foreign competition and a softening economy.”