While I agree in principal that one must set aside the "non operating costs" (the bulk of which are the reorganization costs), United did make money in the 2Q from operations. However, when looking at their operating performance, there are still things that trouble me about the performance of the carrier now, and how the carrier will operate structurally out of bankruptcy.
The basis to determine how any airline is functioning is looking at system costs at a unit level. For the three months ended June 30, GAAP mainline operating CASM increased from 9.87 cents to 10.50 cents (+6.4%). It must be noted, however, that absent fuel expenses, their net CASM droped from 7.75c to 7.53c (-2.8%). While this is a good number, it is an unrealistic one. This assumes that fuel is a zero sum in the equation and we know that fuel is never a zero sum (in fact quite the opposite).
CASM for the six month period increased from 10.04c in 2004 to 10.39c in 2005 (+3.5%) while net CASM decreased from 7.93c to 7.63c (-3.5%).
Gross RASM grew from 10.87c to 11.22 cents in the 2nd qtr (+3.2%) and for the six month period decreased from 11.07 cents to 11.03 cents (-0.4%). Again, if we compare net RASM for 2nd quarter at 9.38c vs. 8.94c (+4.9%) and for six months ending June 30 at 8.93c vs. 8.73c (+2.3%), one could say that United has increased its revenue; however, on a net basis, it would still be losing money from operations.
However, since GAAP revenue is used to determine operating performance, United did grow GAAP RASM faster than GAAP CASM in 2nd quarter, hence the $48M operating earnings. Considering the fact that they carried fewer passengers in the three months during which they achieved this operating return, they did this on increased yield, which is even better news for them. This means they are starting to get some of their premium passengers back.
The bigger problem, however, is that they have been steadily losing passengers for the last six months. Of course, they have been cutting capacity in the domestic markets. Capacity cuts have been larger than passenger declines, therefore it is likely that the passenger losses have been as a result of the capacity cuts.
Now, lets take a breath, there was a lot of analysis in those numbers....
The problem with capacity cuts is that those passengers go somewhere else. All the LCCs and American and Continental have seen significant growth in passengers in 2005, especially on routes in which they compete with United.
Frontier is having its best year ever at Denver.
The question becomes will UA
get those passengers back? Not unless they grow capacity, which means they will have to increase costs to grow the capacity, which means if they cannot increase yield at the same time, they will be right back where they started.
I promised this forum a business plan for UAL that I would publish on a.net for some time. It is now complete; I have sent it to a couple of investors for their review. Until I have heard from those investors, I cannot publish the plan on a.net. Once I have heard from those investors, then I can move forward and publish parts of the plan which are not confidential in nature. I am hoping to hear back soon from those investors.
However, with news today that United has pushed back their reorganization date at the creditors request, it seems increasingly unlikely that the court will allow outside bidders to bid on UAL, which would render the entire process mute. If the creditors are working with United, then it would seem that the creditors have sound reason to believe that what UAL management has done to reorganize the airline has merit, even though we may not believe it is true.
It is my professional opinion that United will not be able to compete with the JetBlues and Southwests in this country with the current organization of its fleet. It cannot put up a product that can pull people away from those carriers.
On the international scene, they do not have a competititive airline product close to that of the best international carriers of the world, especially in Asia. To Europe, there are many other better choices, some of which are in Star Alliance. United will have to take significant steps in capital spending to improve its International Product, especially in F and C and rework Y class to not be a cattle car.
Until then, United will just be the same, until the next economic downturn. Only the next one will be fatal.
Let's just hope better minds will prevail this time.
David L. Lamb, fmr Area Mgr Alitalia SFO 1998-2002, fmr Regional Analyst SFO-UAL 1992-1998