United Continental Holdings Inc (UAL): Avoid This Classic Airline Value Trap

United poised to disappoint again
Stepped up competition has clearly magnified United’s problems over the past year. In 2013, United will see pressure from a different direction: labor cost increases. In order to derive the full benefits of the merger, United needed to integrate its various work groups and sign new labor contracts with its unions. The company made progress on this front over the course of 2012, most notably completing a new joint contract with its pilots during Q4.

However, these agreements come with a price. Many of these labor groups have not received raises in several years. As a result, labor costs are growing rapidly as the new contracts go into effect. For example, the pilot contract included a $400 million lump sum payment (roughly $40,000 per pilot) and an average pay raise of 43.2%. Largely due to the scale of these pay increases, United’s cost per available seat mile, or CASM, (excluding fuel costs and other special items) will increase by approximately 5% in 2013, and 8%-9% in Q1. Even though fuel prices are expected to be slightly lower year over year, United is projecting a 5% consolidated CASM increase in Q1.

In order to maintain approximately the same Q1 profitability as last year, United would need to see PRASM rise by a similar amount (i.e. 5%). However, on the earnings conference call, management predicted a 2.5% gain for January. Unless United can really turn things around in February and March, it will accrue an even bigger loss than last year’s $0.87 adjusted loss per share. However, the current analyst consensus calls for United to more than double its adjusted profit in 2013. Bottom line: Investors will need to trim their expectations once again.

Conclusion
With costs still growing faster than revenues, United is on pace to lag competitors in profitability again in 2013. Investors should be careful not to fall into a value trap, as 2013 EPS is likely to fall short of the current analyst consensus.

The article United Continental: Avoid This Classic Airline Value Trap originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg is short shares of United Continental Holdings. Adam Levine-Weinberg owns shares of Delta Air Lines and has the following options: Short Mar 2013 $14 Calls on Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned.

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