Chicago-based United Continental Holdings, parent of United Airlines, on Thursday said it earned its highest quarterly profit ever, even as it dealt with pressure on revenue and flight tardiness.
U.S. airlines, including United, are enjoying a period of prosperity, benefiting from full planes and low fuel prices. Southwest Airlines, the largest carrier at Midway Airport, also reported record profits Thursday.
United reported a second-quarter profit of $1.19 billion, the largest quarterly profit ever for the company, compared with a $789 million in the same quarter last year. Without $67 million of special items, the airline’s diluted earnings — numbers investors look at — were $1.26 billion, or $3.31 per share, up from $2.34 per share last year and matching the analyst consensus estimate.
Revenue of $9.91 billion, a 4 percent decrease year-over-year, was nearly in line with estimates of $9.94 billion.
The revenue decline was due in part to a strong U.S. dollar, pressure from competitors’ lower pricing and a 30 percent decline in sales to corporate fliers in the oil and gas industry, which is suffering from lower oil prices, Chief Revenue Officer Jim Compton said.
However, ancillary revenue per passenger, a measure of those add-on fees for things such as checked bags and extra legroom, increased in the second quarter by 6.7 percent over last year’s same quarter and now equates to $23 per passenger, Compton said.
While lower oil prices are hurting some of United’s corporate customers, they are directly helping the airline spend less on fuel. Average fuel costs dropped by about one-third, averaging near $2 per gallon instead of nearly $3 last year, which matters because the airline bought 1 billion gallons in the second quarter alone.
United, the largest carrier in Chicago and No. 2 in the world, had on-time problems during the quarter, with an on-time arrival rate of just 66.4 percent, which “did not meet our expectations,” said Greg Hart, chief operations officer. The airline experienced a spike in aircraft maintenance issues during the quarter — a problem it says it is dealing with and is improving, but officials provided no details during a call with analysts and the media Thursday.
And United dealt with severe weather in June, facing thunderstorms at one or more of its hubs during 25 of the 30 days during the month, Hart said. Still, the airline canceled 24,000 fewer flights during the first half of this year than during the same period last year, he said.
United CEO Jeff Smisek took the opportunity Thursday to address the worldwide two-hour grounding of its planes July 8 because of a technology glitch, though the outage didn’t occur in the second quarter.
“We’re focused very heavily on investing in the reliability of our systems,” Smisek said. “I can assure our customers that that investment will continue, and that we’re very focused on not only improving the stability but actually offering additional technology to our customers to permit them to have better information, better choices, better control of their travel — and for our employees that will permit them to do their jobs better.” United said a router problem was to blame for the outage, which perhaps gained more media attention because it happened the same day the New York Stock Exchange systems also went down.
United will share its recent fortunes with shareholders in the form of an additional $3 billion share repurchase program, which the company expects to complete by the end of 2017. A buyback, a periodic repurchase of its own shares, often makes remaining shares more valuable. United currently prefers to give back to shareholders that way rather than paying a dividend, said Chief Financial Officer John Rainey. The company already returned about $250 million to shareholders as part of an existing $1 billion share buyback program. The airline also paid about $800 million of debt and contributed $620 million to its pension plans.
In the second quarter, the company invested $100 million to acquire a 5 percent stake in Azul Brazilian Airlines, and separately invested $30 million to buy a stake in Fulcrum BioEnergy, an alternative fuels company.
United shares are down about 15 percent this year, and on Thursday were down modestly, 0.3 percent, to $56.93 on the New York Stock Exchange.
Analysts seemed generally encouraged by United’s profit report.
“The revenue environment has weakened, but we expect (United) and peers to rein in capacity growth, and see lower fuel prices driving strong profits and cash flows,” said Jim Corridore, equity analyst with S&P Capital IQ, in a note to investors.
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