Unit revenue growth
United Continental Holdings (UAL), which operates United Airlines, reported a 0.4% increase in passenger revenue per available seat mile, or PRASM, during the fourth quarter. PRASM grew to 13.42 cents. In fiscal 2014, there was a 1.6% increase in PRASM, to 13.72 cents.
Although United’s passenger unit revenue is lower compared to most of its peers, only Delta Air Lines (DAL) and Southwest Airlines (LUV) also reported positive unit revenue growth in the fourth quarter. PRASM growth was negative for American Airlines (AAL), Alaska Air Group (ALK), and JetBlue Airways (JBLU).
What’s affecting unit revenue growth?
In 1Q15, United’s unit revenue is expected to remain flat. There are several factors that may be contributing to this projection.
A slowdown in the domestic market
As seen in the fourth quarter of 2014, the domestic market has slowed down. This is expected to continue in the first quarter. As a result, domestic unit revenue is expected to remain flat or increase by no more than 2%.
Pacific network restructuring
A PRASM headwind of 0.5% is expected in 1Q15 as a result of restructuring in the Pacific network. United plans to replace shorter-haul flights with long-haul flights. So, average stage length is expected to increase by 1.5%.
United’s joint venture with All Nippon Airways on trans-Pacific and Asia routes allows it to redeploy aircraft to long-haul routes from the US. It has already stopped short-haul flights between Narita, Hong Kong, and Bangkok and between Melbourne and Sydney. The company has also added long-haul flights from Los Angeles to Melbourne and from San Francisco to Taipei and Chengdu.
Strengthening US dollar
United’s PRASM may be negatively impacted by the strengthening US dollar. While a strong dollar is good for dollar-denominated fuel purchasing, it has a negative impact on international revenues. Currency hedge contracts, however,cover part of the currency risk.
Shift of Mileage Plus revenue
A shift of revenue from the Mileage Plus program to the period when customers redeem miles for travel may also impact PRASM. A headwind of $75 million is expected in the first quarter. Somehow, however, this is expected to reverse in the third and fourth quarter.