Balanced View on United Continental - Analyst Blog

On May 1, 2014, we issued an updated research report on United Continental Holdings Inc. UAL. We find the carriers' plan to cut costs and enhance productivity by spending less on fuel and optimizing distribution channels quite encouraging.

However, increased competition in the Pacific region, weakness in Japanese currency and slot pair wins by rival carriers are likely to affect its performance going forward. The Chicago-based carrier has a Zacks Rank #3 (Hold).

United Continental has already started its restructuring effort and plans a $2 billion reduction in annual costs by cutting fuel cost through more efficient strategies. The carrier also aims at strict capacity deployment to maintain a profitable balance between demand and supply. The company expects second quarter consolidated RRASM (Passenger Revenue per ASM) in the range of 1–3%.

United Continental is focusing on the augmentation of ancillary revenues by $700 million to $3.5 billion by 2017 and expects to reach $3 billion by the end of this year. The company hopes to achieve this by offering new products to customers and increasing fees on the current ones.

United Continental is extending its global route network through non-stop flights and will launch a non-stop service between San Francisco and Chengdu in the second quarter, as part of its Pacific strategy to connect secondary Asian cities. Apart from spreading its international destinations in Ireland and Canada, the carrier also aims to add 8 Asian destinations in 2014 to tap the growing travel demand in the continent  thus paving way for one-stop connectivity to more than 80 different locations in that continent.

However, United Continental's future liquidity could be negatively impacted by the decline in passenger and cargo demand owing to slowdown in certain economies. The carrier also expects weakening of the Japanese economy and the depreciation of Japanese Yen to act as deterrents to its Pacific division, thus dragging the consolidated year-over-year PRASM by 1–2% in the second quarter.

Apart from that, Southwest Airline Co.'s LUV slot wins in LaGuardia and Reagan National Airport DCA, and JetBlue Airways Corp's JBLU triumph in DCA, which is part of the mega merger between American Airlines and U.S. Airways, will heighten competition for United Continental particularly within the domestic market.  

Key Pick from the Sector

Stock worth considering within this sector include Alaska Air Group Inc. ALK, which currently carries a Zacks Rank #1 (Strong Buy).