United Continental's Passenger Fiasco Dulls Traffic Growth

Chicago-based United Continental Holdings, Inc. (NYSE:UAL) , the parent company of United Airlines, recently grabbed headlines, albeit for wrong reasons, with media reports suggesting that a passenger was forcefully removed from a United Continental flight (3411: Chicago to Louisville). The uncalled-for incident seems to have stemmed from the concerned passenger refusing to voluntarily vacate his seat in the overbooked flight. The company’s CEO, Oscar Munoz, in a letter to the employees reportedly said that the incident was “unfortunately compounded.”

The above incident overshadowed the March traffic report of United Continental. Consolidated traffic – measured in revenue passenger miles (RPMs) – increased 3% on a year-over-year basis to 17.6 billion. The uptick was mainly due to a 5.8% rise in domestic traffic. However, the metric declined marginally on the international front due to weakness in the Latin American and Atlantic divisions.

On a year-over-year basis, consolidated capacity (or available seat miles/ASMs) expanded 3.4% to 21.7 billion. Load factor decreased 30 basis points to 81.3% in Mar 2017, as capacity expansion outweighed traffic growth.

This Chicago-based company now expects passenger unit revenues for the first quarter (detailed results will be out on Apr 17) to be flat on a year-over-year basis (previously the metric was expected in the range of a decline of 1% to an increase of 1%). The improved guidance was due to better-than-expected close in traffic for the month. In fact, United Continental’s bullish guidance with respect to this key metric seems to be highly encouraging. This is because rival Delta Air Lines (NYSE:DAL) had trimmed its view with respect to first-quarter passenger unit revenues for the second time, last week.

Additionally, United Continental raised its view for consolidated capacity for the first quarter due to an improvement in completion factor (mainline). The metric is now projected to grow 2.6% on a year-over-year basis (previous guidance had called for an expansion in the band of 1% to 2%). Moreover, first-quarter cost per available seat mile (CASM: excluding profit sharing, fuel & third party business cost) is anticipated to increase in the band of 4.75%–5.25% due to higher labor costs.

Notably, labor deals are in vogue in the airline space. Apart from United Continental Holdings, other players in the space like Southwest Airlines (NYSE:LUV) and American Airlines Group (NASDAQ:AAL) have also signed deals with various labor groups over the past few months.

Price Performance

We note that the United Continental stock underperformed the broader Zacks categorized Transportation-Airline industry over the last three months due to multiple headwinds. While shares of the company declined 4.7%, the industry gained 1.22%.

Zacks Rank

United Continental Holdings currently carries a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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