Tags: United | jets | fuel | cost

United Sees $2 Billion Cost Cuts as New Jets Trim Fuel Bill

Tuesday, 19 November 2013 11:11 AM

United Continental Holdings Inc., the world’s biggest airline, said it will cut $2 billion in annual spending by 2017 with half of the savings coming from lowering fuel expense. The shares advanced.

Fuel consumption will fall 7 percent at United’s jet fleet over four years as it begins using newer, more efficient planes such as Boeing Co.’s 787 Dreamliner and existing aircraft are equipped with winglets to boost conservation, according to a filing today.

United combined with Continental Airlines in 2010 and has struggled since then to control costs that are growing faster for each seat flown a mile than revenue on the same basis. Profit growth trailed competitors in the last quarter and the carrier is counting on an overhaul of its fleet designed to swap gas-guzzlers with more fuel-efficient models.

“We’re very confident we’ll deliver,” Jeff Smisek, United’s chairman and chief executive officer, said today at an investor presentation in New York. “We believe that we can deliver for you, our investors, multiples of our current earnings.”

Regional Fleet

United, based in Chicago, rose 5.4 percent to $38.35 at 10:31 a.m. in New York. The stock had advanced 56 percent this year through yesterday compared with a 26 percent gain for the Standard & Poor’s 500 Index.

The carrier also said it plans to boost revenue from sources other than fares by $700 million a year. The plan was outlined after a series of website and operational issues snarled flights, drove away some customers and eroded sales.

“We are very positive on these stated goals, but where UAL has run into problems over the past two years is in execution of its stated plans,” James Corridore, an analyst with Standard & Poor’s Capital IQ, wrote in a note to clients today. “We would like to see some traction on these plans.”

The carrier plans to reduce the percentage of 50-seat jets in its regional fleet to 53 percent by 2015 from 66 percent today as it bulks up on roomier 76-seat aircraft.

Cash Flow

United expects the new aircraft and other measures to lower maintenance costs by $100 million annually, with another $500 million in potential gains coming from boosting employee productivity. The company also sees $150 million in potential savings from sourcing and $100 million by shifting distribution channels by which it sells fares, according to presentation slides today.

“We’re very focused on that over the four-year period and we’re focused on generating free cash flow so we can do what we should do, which is return cash to our shareholders,” Smisek said today at the presentation, the first as a combined airline.

United will shift use of some of its largest planes, as well as cancel flights between Seattle and Tokyo, and Tokyo and Bangkok. A smaller plane will be used for flights between Tokyo and Seoul and a second daily Houston-Tokyo flight will be added. The carrier will also put Dreamliners into new markets.

Redesigned Website

The airline said it would generate $3.5 billion in ancillary revenue by 2017 through new purchase options for customers and improved pricing on existing products. It also will introduce a redesigned website that will be unveiled in phases over the next year.

United’s third-quarter pretax margin of 5.8 percent trailed the 11.5 percent at Delta Air Lines Inc., 9.5 percent at US Airways Group Inc. and 9.2 percent at Southwest Airlines Co.

In October, Smisek said the carrier had addressed maintenance issues with its biggest planes that resulted in them being placed on less-than optimal routes. Those changes are expected to create a $40 million annual benefit, the airline said. United also has resolved a revenue management system error that caused it to sell too many low fares for too long.

Revenue Falter

United has suffered at least four public computer disruptions from March 2012, when it switched reservations systems, through mid-September of this year. In the most recent incident, United agreed to honor $0 fares mistakenly sold on its website for several hours. The carrier blamed the error on faulty reservations data and had to close the booking engine on its United.com website to fix the error.

The carrier has seen revenue falter in China as increasing flights to the world’s most populous country have eroded fares. United, the biggest U.S. carrier on flights to China, has said it carried fewer passengers for average lower fares because of that competition.

Last month, United was fined $1.1 million by U.S. regulators for stranding 939 passengers on 13 planes for longer than federal rules permit as thunderstorms disrupted traffic at Chicago’s O’Hare airport in July 2012. It was the largest penalty since such rules took effect in 2010.

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United Continental Holdings Inc., the world's biggest airline, said it will cut $2 billion in annual spending by 2017 with half of the savings coming from lowering fuel expense.
Tuesday, 19 November 2013 11:11 AM
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