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United looks to used-aircraft market to control spending

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Capacity growth in 2015

Driven by higher growth in international markets, United Continental Holdings (UAL), which operates United Airlines expects to increase capacity by 0% to 1% in 1Q15 and by 1.5% to 2.5% in 2015. While international markets are expected to grow at 3% to 4%, domestic growth is estimated at 0.5% to 1.5%.

Pacific and Latin American markets will see strong capacity growth. Management states that 50% of capacity growth will come from the installation of slim line seats on 450 aircraft by the end of 2015. Another 40% growth will come from the addition of 11 mainline aircraft, and the remaining 10% will come from upgauging, or increasing the number of seats on regional aircraft, as the company plans to replace 90 50-seaters with 53 E1735s.

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Capital expenditure

Capital expenditure for 4Q14 was $1 billion and $3.1 billion in 2014. In 2015, the company expected to take delivery of the following aircraft:

  • eleven 787-9s
  • twelve 737-900 ERs
  • two used 737-700s
  • forty-nine E-175s

To keep capital expenditures lower, United is exploring the used-aircraft market. It may also extend the useful life of some of its existing aircraft. Capital expenditure for 2015 is expected to be $3.2 billion and an annual average capex of $2.7 billion to $2.9 billion is expected over the next three to four years.

United’s return on invested capital has increased from 10% in 2013 to 12.9% in 2014. And, its long-term goal is to generate return greater than 10%. Higher returns on investment encourage capacity expansion in the airline industry, further accelerating growth. All US airlines, including Delta Air Lines (DAL), American Airlines (AAL), United Continental Holdings(UAL), Alaska Air Group (ALK), JetBlue Airways (JBLU), and Southwest Airlines (LUV), generated higher returns on their investment in 2014.

Transportation ETFs such as the iShares Transportation Average ETF (IYT), and the SPDR S&P Transportation ETF (XTN) hold more than 2% of their portfolios in United’s shares.

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