United shares drop after airline reports lower 1Q profit

AP News
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Posted: Apr 21, 2016 3:40 PM

DALLAS (AP) — Shares of United Airlines' parent dropped sharply on Thursday after the company reported lower first-quarter profit and gave a disappointing outlook for the second quarter.

In afternoon trading, shares of United Continental Holdings Inc. were down $5.46, or 9.3 percent, to $53.14.

Chicago-based United, the nation's No. 3 airline by traffic, reported after the market closed Wednesday that first-quarter profit fell 38 percent to $313 million.

It was still one of United's best-ever first quarters — usually a weak period for travel. But revenue fell 5 percent, and United said it expects that a key revenue-per-seat figure will keep falling in the second quarter, when airline fortunes usually pick up.

On a conference call Thursday, analysts pressed United executives about the airline's profit margin, which remains far behind major competitors. Some of the questions were unusually pointed.

JP Morgan's Jamie Baker called United's second-quarter outlook "pretty unimpressive," and he asked whether executives had a plan for catching up to rivals or "does mediocrity suffice?"

Oscar Munoz, who became CEO in September but just returned from a heart transplant and five-month medical leave, said United would not concede anything. Changes are needed, he acknowledged.

"We need to be, in my mind, a bit more disruptive in the marketplace," Munoz said. "I think we have been standing by a little bit too much."

Munoz said his team was beginning to work on steps to improve the company and will hold another call with analysts in June to detail "initiatives we have under way."

Chief revenue officer James Compton said United was prepared to reduce capacity, a method airlines use to increase fares by reducing the supply of seats. United has already made some cuts in Houston, Brazil, and the Middle East, he said.

Compton said the airline now expects to increase passenger-carrying capacity by no more than 2 percent this year, a half-point lower than previously planned. That could help shore up fares if other airlines do the same.

United faces the same challenges as other airlines — only more so. The biggest may be reversing the downward trend in fares, which led to a 5 percent decline in United's first-quarter revenue. United's forecast of revenue per mile in the second quarter was worse than guidance from Delta and Southwest. American will report earnings Friday.

United's international routes are being hurt by rising competition from foreign carriers who have flooded the market with flights. At home, analysts say that United has lost corporate accounts, especially to Delta.

United says its Houston hub is struggling because of the slump in the oil industry. Southwest CEO Gary Kelly said Thursday that his airline is doing just fine in Houston, where it has been expanding domestic routes and recently added international flights.

"We don't really compare ourselves to United," Kelly said, "but we have had great success in Houston over the past four years."

From the day he became CEO, Munoz has acknowledged that United has failed its customers since its 2010 merger with Continental and needs to do better. He repeated that message Thursday.

"We have lost some customers," he said on CNBC. "We need to rebuild the trust with those customers and get them back."

That will require United to make decisions about where it flies, the level of service it provides, and many other choices.

Munoz's team may have been distracted from that work over the past two months by a potential proxy fight with two major shareholders who were unhappy with the company's profits and stock performance. On Wednesday, United and the shareholders announced a settlement that will avert a showdown at the annual meeting this summer.

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Follow David Koenig at http://twitter.com/airlinewriter