United expects low
airfares and wage hikes will squeeze profit
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[October 18, 2016]
By Jeffrey Dastin
Continental Holdings Inc on Monday said cheap airfares and higher wages
from new contracts will squeeze its results this fall, making it
difficult to be as profitable as competitors.
United, the No. 3 U.S. airline by passenger traffic, said profit fell 80
percent to $965 million in the third quarter, due to a one-time
accounting gain last year related to taxes. The airline's income fell 6
percent on a pre-tax basis and topped what analysts were expecting on
average, according to Thomson Reuters I/B/E/S.
While plummeting fuel costs led to a blockbuster rise in U.S. airline
earnings since 2014, oil prices have to a degree plateaued, no longer
masking drops in revenue.
Budget carriers like Norwegian Air Shuttle ASA <NWC.OL> are fighting
larger airlines over a fixed number of travelers to Europe - and
charging less per ticket.
United is offering fewer seats across the Atlantic this fall to prop up
prices and overall is optimistic about revenue in coming months, Chief
Commercial Officer Julia Haywood told reporters Monday on a conference
The airline expects passenger unit revenue, which compares sales to how
many seats United flies and how far it flies them, to decline between 4
percent and 6 percent in the fourth quarter - a notch better than the
5.8 percent drop it posted for the third quarter.
But new labor deals may delay United's goal to match the margins of No.2
Delta Air Lines Inc <DAL.N>, which are about twice as large.
United and Southwest Airlines Co <LUV.N> "face the most cost pressure in
2017 from contracts ratified in 2016 among the large airlines, but both
are ending long, painful negotiating processes and achieving gains in
key contracts," Credit Suisse analyst Julie Yates said in a recent
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A United Airlines plane with the Continental Airlines logo on its
tail, taxis to the runway at O'Hare International airport in Chicago
October 1, 2010. REUTERS/Frank Polich
For instance, a new contract for United's flight attendants raised wages
between 18 percent and 31 percent in September. Labor costs make up the
lion's share of United's forecast for unit costs to increase between
4.75 percent and 5.75 percent, excluding fuel and other charges.
"We think it's going to be a real advantage for us," Chief Financial
Officer Andrew Levy said of the labor deals, noting benefits they will
bring from work groups integrating.
United expects an adjusted pre-tax profit margin of 5 percent to 7
percent for the fourth quarter, about half the year-ago level.
Investors are looking to see if United can pass higher labor costs on to
customers through fare hikes, said Adam Hackel of Imperial Capital LLC.
Shares were unchanged in after-hours trading.
(Reporting by Jeffrey Dastin in New York; Editing by Richard Chang and
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