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United Airlines (UAUA)Stock (Airlines Industry, Transportation Industry)
 UAL Corporation (Nasdaq:UAUA) is the parent company of the 2nd largest passenger airline in the world by Available seat miles (ASM), United Airlines. The company recently emerged from protracted bankruptcy proceedings. With hubs in Los Angeles, San Francisco, Denver, Chicago and Washington D.C., United operates more than 3,300 flights per day.[1]United flights take passengers to over 200 locations in the U.S. and internationally. As with all airlines, oil prices are a significant factor in the company's performance. Its reorganized business plan, filed prior to emergence from bankruptcy, was based on an average crude price of $50 per barrel. This price has proven optimistic, however, and with prices recently rising over $120 per barrel, financial performance has suffered despite significant cost reductions during reorganization. The first quarter 2008 performance showed just how important crude prices can be, United reported a $542 million loss for the quarter.[2] However, UAL's profit outlook for 2009 is on the rise, following a drop in oil prices since July 2008 which reached roughly $68 per barrel in October 2008.[3] United is depending on international traffic to drive its growth, and has focused its efforts on lucrative routes to Asia (especially China), South America and, most recently, the Middle East. United is the only US airline to fly to Kuwait and Vietnam, for example, and has the largest number of daily non-stops to China of any US carrier. However, their expansion plans have been greatly reduced by rising fuel costs. In fact, they now plan to downsize fourth quarter capacity by 14%. After coming out in May with plans to cut their fleet size by 30 planes, they announced further cuts to 100 total planes in June.[4][5]
[edit] Operating SegmentsUnited breaks down its operations into two segments known as Mainline and United Express. The mainline operations include service to approximately 90 domestic destinations as well as international service to the Pacific, Atlantic and Latin American Regions. United Express serves as an extension to the mainline service and provides service through various carriers that operate under capacity service agreements with United. [edit] Mainline ServicesUnited's mainline services operated 460 aircraft in 2007. This segment services destinations within the U.S. and Canada (domestic) as well as in Europe, Asia and Latin America (international). In 2007 mainline services provided $17.0 billion in operating revenue for UAL. Mainline domestic services operate through hubs in Chicago, Los Angeles, Denver, San Francisco and Washington D.C. In 2007 United's mainline domestic operations accounted for $10.9 billion in operating revenue for UAL.[1] The mainline international operations service locations around the globe, which are broken down into different regions as noted above. The Pacific region includes non-stop service to many Asian cities include Beijing, Hong Kong, Seoul, Shanghai, Sydney, Tokyo and Taipei. Service to Guangzhou, China is expected to resume in June 2008. The Pacific operations also provide direct service to other major cities in the region. The Atlantic region includes non-stop service to many major European cities including Amsterdam, London, Munich, Paris and Rome. Finally, the Latin American service provides non-stop service to Buenos Aires, Sao Paulo and direct service to Rio de Janeiro. Locations in Mexico and the Caribbean are also included in the Latin American operations segment. In 2007 operating revenues for international mainline operations accounted for $6.1 billion in operating revenue for UAL.[1] [edit] United's Failed Budget Airline - Ted_N475UA-1235.jpg) United tried its hand in the budget airline sector with the creation of Ted Airlines in 2003. Revenues from this segment were included in mainline operations. The fleet, comprised of 53 Airbus 320 aircraft[1], was configured as a single class service and flies specific routes where low-cost carriers had encroached on United's business. Ted operated flights from the five major United hubs to locations in California, Arizona, Florida, Louisiana, Nevada, Mexico and the Caribbean. Ted flights offered premium economy seating which generated incremental revenue when flyers "upgraded" into these seats at check-in, or purchase Economy Plus Access in advance. On 4 June 2008, United announced the discontinuing of Ted as part of a broader cost cutting program. This segment failed in light of higher oil prices and slowing U.S. demand for airline travel. The discontinuing of Ted also brought the news of the Sean Donohue, Ted's creator and United's executive vice president, leaving the company.[6]
[edit] United ExpressThe United Express segment earns revenue through flights operated by third party carriers under contract. These carriers include SkyWest Airlines, Mesa Airlines, Colgan Airlines, Chautuaqua Airlines, Shuttle America, Trans State Airlines, GoJet Airlines and ExpressJet Airlines. Under their contracts with these carriers United pays contractually agreed fees for operating the flights. United is responsible for all fuel costs, facilities rent, de-icing costs and landing fees. In return United determines the pricing, revenues, inventory and schedules for flights operated by these carriers. United Express is typically operated by smaller aircraft between smaller airports and United's hub airports. The largest aircraft operated by United Express affiliates is the Embraer 170. In 2007 United Express revenues were $3.1 billion. The segment operated 279 aircraft and generated approximately 16 billion ASMs during this period. [edit] Other Operations[edit] United CargoUnited also offers cargo services for both domestic and international shipping. Freight shipments accounted for 90% of the cargo segment's volume in 2007 with mail accounting for the remaining 10%. In 2007 Cargo generated $770 million in revenue, or approximately 4% of total revenues for the company.[1] [edit] United ServicesUnited Services is an airline support business that provides maintenance and repair services globally. In 2007 United generated $183 million in third party revenue, an decrease of 15% from 2006. [edit] AlliancesUnited generates revenue through agreements with other airlines that include various features. Some features of United's alliance agreements include shared frequent flier programs, code sharing of flight operations, coordination of reservations, ticketing and baggage handling. Under code sharing agreements some seats of one carrier's flight can be marketed and sold under the brand name of another carrier. Revenue from these codeshare operations are not broken out separately in United's financial reports. United operates codeshare flights with regional partners, international partners and members of the Star Alliance. United's deepest relationship appears to be with German carrier Lufthansa, with codeshare operations on transatlantic flights on both carriers. (Lufthansa sells United flights under LH flight numbers, and United likewise sells Lufthansa flights under UA flight numbers.) In such cases, the routes are operated by both airlines. Star Alliance carriers (complete list) such as Air Canada, Air New Zealand, South African Airways and British Midland also offer flights sold under United flight numbers, the sale of which generates revenue for United. The financial impact of expanded codeshare agreements is unclear, although it is generally assumed that any expansion in codeshare agreements has a net positive impact on the earnings of both carriers through increased sales and better integration of the networks of both airlines. The future integration of both Shanghai Airlines and Air China into the Star Alliance network is sure to have an appreciable positive impact on United as its route network (i.e., flights sold with UA flight numbers) within China will increase substantially.   [edit] Classes of Service
[edit] Key Trends and Forces[edit] Fuel CostsFuel has represented the largest operating expense for United since 2005. In 2007 fuel costs accounted for 26.2% of total operating expenses, costing over $5 billion in that year alone.[1] As oil has inched up past $120 a barrel, fuel costs accounted for over 57% of operating expense in the first quarter of 2008.[7] While the airlines have hedging strategies that allow them to lock in fuel prices for future dates, the rising cost of oil means that flights that were profitable at lower fuel costs are no longer economically viable with such inflated oil prices. When the legacy carriers emerged from bankruptcy, their new lenders set certain ratios in regard to fixed cost coverage and free cash flows. Surging fuel costs have caused UAL to violate its fixed cost coverage ratio. This means that their revenues are not covering their fixed costs by enough of a margin. They have renegotiated with lenders to waive these ratios through the first quarter of 2009.[8] This is a bad signal for expected profitability in that term. However, oil prices reached less than $68 per barrel on October 31, 2008, less than half of its peak price in July.[3] Like other airlines, UAL has entered into hedging agreements to secure breakeven at oil prices of near $130 per barrel.[3] As a result of lower prices, United and other airlines have boosted their confidence in being profitable in 2009.[3]
[edit] Domestic RegulationAirlines are regulated by the Federal Aviation Administration (FAA), a division of the Department of Transportation. The FAA controls and regulates the industry and such regulations can in some cases make operations more difficult for airlines. In the summer of 2007, for example, due to public outcry against significant delays at airports the FAA announced plans to impose capacity restrictions at JFK and Newark airports beginning in summer 2008. Furthermore, United expects that legislation imposing more specific customer service requirements will be passed by congress in 2008. Such requirements could increase costs for United and other airlines in the industry. [edit] Merger TalksUnited has been the topic of many merger rumors since mid 2007. While both companies deny the claim, rumors have spread that Delta and United held talks to discuss merger options in late 2007. Now that Delta and Northwest have merged some claim that this could be a major catalyst for further consolidation in the industry.[9] Mergers within the airline industry can be beneficial to carriers in that they can claim a significant market share advantage and scale their operations to be more efficient. Furthermore, through a merger companies with different traffic and route patterns can increase their exposure to major domestic routes while cutting down the number of flights that compete with each other. In a major blow to United, Continental backed out of a nearly complete merger arrangement after seeings United's worse than expected 1st quarter 08 earnings.[10] The next candidate was US Airways, and talks began immediately following the Continental misstep.[11] However, after nearly two months of negotiations it appears that the deal may be off. Sources have cited possible labor union opposition and high integration costs as deterrents for the merger.[12] [edit] CompetitionUnited faces a raft of competitors in all segments of its business, both domestically and internationally. It enjoys limited competition on routes that are heavily regulated, such as US-China routes, but new competitors will be entering these markets over the coming years as new carriers are granted rights under recent US-China treaties. For example, Delta Air Lines has recently expressed interest in expanding into routes in Asia. The below table compares some key metrics within the airline industry. Available seat miles (ASM) is the number of seats available times the number of miles flown - so it tracks the seat supply of each carrier. Revenue Passenger Miles (RPM) is the number of filled seats times the number of miles flown. Yield measures the revenue per filled seat and can be considered as a metric similar to margin. Load indicates the percentage of available seats that are filled. Finally, Revenue per ASM indicates the number of cents the carrier earns per available seat mile. United is very competitive within the industry by these metrics. It ranks second in ASM, RPM and Load factor, and ranks 6th and 8th in Revenue per ASM and Yield respectively.
 United Airlines2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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