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United Continental and US Airways Troubled by Fuel Costs

publication date: Jul 22, 2011
author/source: Valuentum Analysts

United Continental (UAL) reported a second-quarter net profit of roughly $1.49 per share Thursday (net income fell 12%), excluding special items, with passenger revenue advancing over 10% compared to the same period a year ago – unit passenger revenue improved 9% from the prior year period. The airline continues to face the burden of rising fuel costs, as second-quarter fuel expense increased a whopping 45% on a year-over-year basis. Unit costs, excluding special items advanced over 11%, driving lower profits from the prior-year period. We view United Continental’s liquidity position as adequate, with $8.6 billion in unrestricted cash, cash equivalents and short-term investments on hand as of the end of the second quarter. We’re also quite pleased with the carrier’s continued integration efforts (United and Continental merged in 2010) and believe the firm to be one of the better major domestic airlines. However, we see no reason to rush out to buy the firm's stock, given poor industry fundamentals.

US Airways (LCC) reported its second-quarter results Thursday that showed more of the same. Similar to United Continental, net profit fell, but in US Airways’ case, it dropped considerably more. The company posted a net profit of $92 million in its second quarter, which compares to almost $300 million in the same period a year ago. The major culprit for the decline was jet fuel, the prices of which advanced 47% at the company. US Airways estimates that it would have paid $400 million less in fuel had its price remained level with the prior-year period. The airline's top-line expanded 10% in the period, while its mainline unit cost structure jumped nearly 15%, leading to the net profit decline. In all, we weren’t thrilled by US Airways’ second-quarter results and view it as our second-least favorite carrier, after AMR Corp. (AMR), the parent of American Airlines. US Airways’ liquidity position appears adequate at this time (the company has about $2.6 billion in total cash and investments), but this stockpile will certainly be challenged should fuel prices continue to escalate or the domestic economy falter. US Airways has the largest exposure to domestic air travel out of the Big Four carriers – including AMR Corp., Delta (DAL) , and United Continental - a key geographic disadvantage, in our opinion. We maintain our negative view on the airline group and think investors should steer clear of US Airways’ stock, in particular.

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