United Airlines Up On Announcement Of Plans To Drive Value

United Airlines, a subsidiary of United Continental Holdings Inc. (NYSE:UAL) , recently announced its plans to streamline its operations to bring itself back on the path of growth and profitability. At its investor call, the company outlined revenue enhancing and cost-cutting targets along with improving its outlook for the second quarter of 2016. United Airlines now expects passenger unit revenue to decline by 6.5–7.5% as against 6.5–8.5% projected earlier.

The company’s shares gained 3.36% after these announcements.

United’s Future Plans

United Airlines is aiming for revenue and efficiency gain of $3.1 billion through 2018. Three key target areas for implantation of its plans include commercial enhancements to increase revenues, cost structure improvisations to boost margins and better operational performance to enhance efficiency.

United Airlines expects commercial organizations to create value worth $1.5 billion. Customer segmentation is expected to generate $1 billion of revenues. United Airlines also expects to increase economy and front-cabin seating by 20% and 30%, respectively and boost third party channel sales to generate a total value of $750 million through 2018. New products like competitive entry level fares and customer centric bundled products are expected to generate $150 million and $100 million, respectively. In addition to customer segmentation, revenue enhancements are expected to generate approximately $500 million through a revamped Mileage Plus program ($300 million) and better revenue management system ($200 million).

The company expects redesigning of its cost structure to generate value worth $1.3 billion by 2018. United will be installing slimline seats and upgauge aircrafts to gain about $800 million. Effective cost-management programs comprising advance technology and integrated systems should help the company save another $500 million.

The company expects to generate the remaining $300 million from operational improvement. United has faced traveler ire in the past for cancellations as well as late arrivals and departures. However, the company has worked on these drawbacks and achieved better on-time arrival performances this year. By working on its shortcomings, the company exepcts to regain the confidence of its customers
In addition to its value-generating initiatives, the company will review its airport hubs, offer better food and beverages and provide customer-friendly application on mobile and the web for its customers.

Recent Developments

United Airlines recently announced the launch of United Polaris for its Business Class passengers to win back corporate travelers. The company has also signed new contracts with pilots, IAM-represented employees and dispatchers. Employee issues have been a major concern for the company and CEO, Oscar Munoz, has been grappling with the problems since his appointment last year. Settlement of these issues will undoubtedly help in improving the company’s performance. United Airlines seems to be on track to regain its prominence in the industry as well as provide a touch competition to rivals such as American Airlines Group Inc. (NASDAQ:AAL) and Delta Air Lines Inc. (NYSE:DAL) . However, high capacity growth and low demand, global issues such as terrorist attacks and threat of the U.K. exiting the European Union – commonly referred to as Brexit – could affect the company’s expected performance targets.

Zacks Rank and a Stock to Consider

United Continental Holdings currently has a Zacks Rank #5 (Strong Sell). Investors interested in the airline industry could consider Air France-KLM SA (OTC:AFLYY) , which sports a Zacks Rank #1 (Strong Buy).