United Continental Holdings Inc (NYSE:UAL) faced several challenges in 2012, as it weathered the lingering effects of its merger with Continental. Customers endured system failures, flight delays, and cancellations, hurting the carrier’s reputation — and its customer traffic. In a year, where several other US airlines performed extremely well and booked large profits, the revenue premium (passenger revenue per unit) of Continental fell sharply as it reported a loss of $723 million. Going forward, United needs to improve several facets of its business in order to compete with other American airlines. If it can do so, I believe its share price could enjoy significant upside.
Improved Performance will Lead to Passenger Growth
The integration process between United and Continental reduced the carrier’s on-time arrival rate to 63% during July 2012. However, United Continental Holdings Inc (NYSE:UAL) made considerable efforts to improve its performance, and recently reported 80% on-time arrivals for February 2013. If the airline can maintain this rate and continue to improve performance, then positive word of mouth should help the passenger traffic grow. But it’s absolutely mandatory for the airline to maintain that operational reliability in order to negate all the reputation damage incurred during 2012.
United has turned its attention to improving the basics and gaining competitive edge through much-improved customer service. In order to offer an enhanced customer experience, United is investing heavily in special flight crew training; in addition, it is also involved in developing a mobile application to give loyal customers easier check-ins and and augment the overall experience.
To further bolster the customer experience, it is installing WiFi in aircraft. Nowadays, several airlines use on ground internet services to offer Wi-Fi during flights. But these services cut out over water, or if the aircraft is far from any ground station. The new satellite-based Wi-Fi technology offered by United Continental Holdings Inc (NYSE:UAL) will enable a superior experience, eliminating glitches such as network blackouts. Corporate travellers contribute a substantial share to the overall revenues of United, and such an initiative is extremely attractive to the segment.
United has also shown interest in changing the seating structure in the premium class, installing new flat beds and developing incrementally on the overall experience.
Corporate passengers usually have unplanned travel, booking last-minute tickets. This results in higher fares for the travellers, which supports a higher revenue premium for the airlines. In the last six months, United madeconsiderable improvements in all facets, and now looks set to attract a higher volume of business travellers. If it can manage to incrementally develop on the progress shown, the revenue premium is certain to exceed all expectations.
Current Standing against Competition
United Continental Holdings Inc (NYSE:UAL) primarily competes with Delta Air Lines, Inc. (NYSE:DAL) and US Airways Group, Inc. (NYSE:LCC).
Delta is certainly one of the premier air carriers in the US. The company has a market cap of $13.9 billion and registered robust profitability during 2012. Delta is a massive player in the domestic airline sector; additionally it also has a large presence in the international airline market.
Delta Air Lines, Inc. (NYSE:DAL) is a member of the Sky Team global airline alliance, and possesses an international code-sharing agreement with several international carriers. It has one of the highest market shares in the US domestic airline sector, and recently made several initiatives to reduce its operating cost in order to bolster profitability. Efforts include acquiring a refinery to reduce its fuel costs, and buying smaller aircraft to increase operating efficiency.
Similarly, $2.6 billion company US Airways Group, Inc. (NYSE:LCC) also offers air travel to several US and international destinations. The domestic market contributes roughly 43% to its overall revenue, followed by express carriers and international travel. Both airlines compete directly with United locally and internationally.
Better Results Possible?
Keep in mind that the factors mentioned above are not enough to guarantee profitability for an airline. Other macroeconomic factors such as fuel prices and employment rates also determine success or failure. Rising or falling airfares have a very strong relationship with oil prices, since it is the biggest operating cost for the airline industry. If margins fall due to competitive pressures and rising oil prices, the stock price of any airline company will face a stern test.
After discarding the macroeconomic factors, the efforts made by United certainly point at a recovery. I believe that going forward, these initiatives will revive its corporate travel customers. Unless a huge hike in oil prices squeezes margins, the carrier should report a strong 2013.
The article United’s Key to a Brighter 2013 originally appeared on Fool.com and is written by Ashit Gulati.
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