United: Growth plans on little expenditure
Read between the lines: Don't even think this fight for pay and scope is going to be in anyway easy. Also, note the payment to Lufthansa and Air Canada mentioned at the end of the article. All red text is emphasis added by me.
United makes global plans on shoestring budget
Following merger with Continental, 18 new routes added and plans for international expansion are in works. Resources, however, will not be added.
October 21, 2010|By Julie Johnsson, Tribune Reporter
Newly merged United Airlines, which encompasses the old Continental Airlines, has global ambitions and a pile of cash.
But executives at the world's largest carrier are under orders to keep spending in check and to get the most out of the airline's 700-strong jet fleet as they knit the remnants of United and Continental together into a worldwide network.
United on Thursday unveiled the first major changes that it plans to make to its domestic network since its merger with Continental, adding a total of 18 new routes, including service from Denver to Dallas Love Field, Southwest's home base. The carrier previously said it would extend its reach overseas with new flights to Mexico, Shanghai and, pending government approval, Cairo.
O'Hare International Airport was the only hub not to gain new destinations in the first wave of expansion by the new United, but it hasn't been overlooked, said United spokeswoman Jean Medina.
"O'Hare serves a wide breadth of destinations today," she said. "That said, we're just beginning to roll out the new destinations, and we expect to add additional cities from O'Hare soon."
Breaking with precedent, United said it would extend its reach by stretching existing resources rather than ordering scores of new planes.
Its capacity will increase just 1 percent to 2 percent in 2011, United CEO Jeff Smisek told analysts Thursday, reinforcing the tight curbs on growth and spending that have propelled the Chicago carrier and its peers to profitability.
"I want to be clear that at the new United, we remain committed to capacity discipline," Smisek said during his first earnings call as United's chief executive. He headed Continental prior to the merger.
United Continental Holdings Inc., the parent company created by the Oct. 1 merger of United and Continental, released earnings Thursday for both sides of its business. United reported that net income during the third quarter rose to $473 million, or $2.12 per diluted share, excluding fuel and merger-related charges. That's a $533 million improvement from 2009 results.
Continental's net income of $367 million, or $2.24 per share, was a $365 million improvement over prior-year results.
In fact, Bloomberg calculated that the eight largest U.S. carriers reported a combined net income of $2.44 billion for the quarter, surpassing analysts' estimates.
United was among the first to adopt a no-growth strategy in 2008 as skyrocketing oil prices were followed by the Great Recession. Although the economy is recovering slowly, major airlines have kept a tight lid on capacity, in contrast to the industry's previous boom-bust cycles.
"This is all new territory, and it really didn't happen until oil hit $140 (per barrel)," said Roger King, airline analyst with CreditSights Inc. "Then, people realized you can't fly flights that don't make money."
United and Continental will report combined earnings for the fourth quarter and aren't expected to unveil many features that will shape customers' experience on the merged carrier until early next year. But parent United Continental has a leg up on competitors because it is sitting on $9.1 billion in cash, the largest reserves of any U.S. carrier.
Both airlines have catered to business travelers and are poised to reap additional rewards as they meld Continental's long reach into Europe and Latin America with United's sprawling Pacific network, analysts said.
That's provided Smisek can keep labor tensions in check and service at a high level until United and Continental gain a single operating certificate from the Federal Aviation Administration. The airline says it expects to reach that milestone by the end of 2011, about six months ahead of its original estimate.
While the airline waits to gain FAA approval to meld United and Continental's fleets, its planners are moving around the 547 regional jets flown by its contract partners, trying to best match aircraft to passenger demand on routes.
Seventy-seat jets operated by United Express, for example, are being moved into Continental's hubs at Cleveland, Newark and Houston, Smisek said. Continental previously was barred from operating such jets by a provision in its pilots contract.
The new United is also expanding its overseas reach through joint ventures with its Star Alliance partners, for which it has received antitrust immunity to coordinate schedules and divvy up revenues.
But such complicated arrangements aren't without hiccups, as United is learning.
United will have to pay a total of $100 million this quarter to Star Alliance partners Lufthansa and Air Canada, executives said. Continental and United formed the joint venture with the two overseas carriers in 2008, when Houston-based Continental decided to defect to Star from SkyTeam, its previous marketing alliance.
But the two new flights to Germany that Continental started as a result of the partnership proved far more profitable than Continental had anticipated over the first nine months of 2010, and now United will have to share a larger cut of that gain with its overseas partners, said Jim Compton, United's chief revenue officer.
In fact, Continental's partner revenues were up 83 percent as a result of the venture and its switch to Star late last year.
"It sounds like this is a case where Star, in all its forms, really does perform," said aviation consultant Robert Mann. "I can't recall anyone else being quite so transparent about their deals."