On Monday afternoon, airline giant United Continental (NYSE: UAL) reported that its first-quarter adjusted earnings per share totaled $0.41. This showing exceeded the average analyst estimate of $0.38. In addition, United finally managed to stabilize its unit revenue last quarter, posting a 0.1% increase in revenue per available seat mile (RASM).
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United's Q1 earnings report was highly anticipated because of the company's recent incident involving the forceful removal of a passenger. However, neither the earnings report nor the company's conference call shed much light on whether this PR disaster will hurt United -- and its shareholders. Here are three big post-earnings takeaways for investors.
"Better than expected" doesn't mean "good"
Several media outlets described United Continental's earnings report as "strong,"but that's a bit of an exaggeration. While earnings came in slightly ahead of the analyst consensus, it's more noteworthy that EPS plunged 67% year over year.
United's earnings plunged last quarter but still beat analysts' expectations. Image source: United Airlines.
To be fair, most airlines are reporting big profit declines for the first quarter, as they haven't been able to offset large increases in fuel and labor costs yet. Furthermore, United's 2.3% pre-tax margin was near the high end of the guidance range it provided back in January.
Nevertheless, United continues to lag its peers in terms of profitability, most notably Delta Air Lines (NYSE: DAL). Last week, Delta reported a Q1 adjusted pre-tax margin of 9.3%.
The severity of United Continental's margin deficit relative to Delta is exaggerated in the first quarter, because of seasonality. However, it won't narrow the gap very much in the second quarter. United has forecast that its Q2 adjusted pre-tax margin will be 10% to 12%.For comparison, Delta projects that it will earn an operating margin of 17% to 19% this quarter, which would imply a pre-tax margin of roughly 16% to 18%, 6 percentage points ahead of United.
It's too early to know if United will face a meaningful backlash
United Continental expects the revenue environment to improve again in the second quarter. It forecast that RASM will rise 1% to 3% this quarter, accelerating from the 0.1% increase it logged in Q1. This outlook is right in line with Delta's unit revenue forecast.
It would also suggest at first glance that United isn't seeing any backlash from the highly publicized mistreatment of a customer who was bumped off a flight after already being seated. However, it's simply too early to know whether the media attention and public outrage will affect bookings enough that it would hurt unit revenue.
Management admitted as much on United's earnings call on Tuesday morning. There are only a few days of post-incident booking data so far, and there's a lot of noise in the numbers because of the timing of Easter. As a result, the unit revenue guidance doesn't include any projected change in customer behavior.
It's also reasonable to assume that leisure travelers are more likely to avoid United than are business travelers, who tend to be more loyal to particular carriers. Since leisure travelers tend to buy tickets further ahead, any change in booking behavior would affect Q3, and potentially future periods, far more than the current quarter.
United Continental is sticking with its strategy
Last month, United increased its full-year capacity guidance, saying that it intended to regain its "natural" market share. Much of the incremental capacity growth will come through higher utilization during peak periods, which should be good for United's profit margin, at least in theory.
However, a strategy predicated on regaining market share might seem inappropriate for a company in the midst of a PR crisis. If a significant number of consumers deliberately avoid United at the same time that it's increasing capacity at a faster rate, it could jeopardize the carrier's unit revenue recovery.
Some analysts have also noted that it's odd for United -- which has the highest unit costs and lowest profit margin of the three legacy carriers -- to be expanding the most.
Nevertheless, on the earnings call, United executives defended the current approach. The company's recent initiatives to improve its revenue-management techniques are starting to bear fruit, and management is equally confident about its capacity growth plan.
Wait and see
Throughout the earnings release and subsequent conference call, United Continental's management adopted an apologetic but confident tone. That's just what United shareholders wanted to see. But there's no way for United's management -- or investors -- to know at this point whether this month's passenger-dragging incident damaged the company's turnaround progress.
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