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Will United Continental’s Profits Continue to Improve in 2016?

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Historic performance

United Continental Holdings (UAL) made pretax earnings of $4.5 billion in 2015, the highest ever in United’s history. The airline also achieved a return on invested capital of 21%, another record for United.

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Financial performance

The fourth quarter of the year marked the seventh straight quarter of record earnings for United Continental, as the airline reported a net income of $934 million and earnings per share (or EPS) of $2.54. The airline saw a strong 73% year-over-year (or YoY) increase in its operating income despite a 3% YoY decline in revenues for the quarter. The airline saved about $700 million in expenses this quarter compared to last year.

For the full year, UAL’s operating income jumped 117% to above $5 million due to a 10.5% YoY decline in operating expenses. The airline reported $4.5 billion of net income and an EPS of $11.88 per share in 2015. The pretax margin stood at 11.9%, or 6.8 points, higher than last year, also the highest in United’s history.

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Cost discipline helped United

Despite revenue declines, UAL’s profit growth came as a result of disciplined cost management by United Continental. For the full year, the airline’s unit costs (excluding fuel, profit sharing, and third-party expenses) decreased 0.7%, more than 1 point lower than their initial 2015 guidance, despite its lower-than-planned capacity reduction.

Fuel costs fell by 36% during the year. Fuel savings have been a big booster for the airline. The airline noted that their Project Quality and upgauging strategy, as well as better completion as a result of improved operational performance, played a key role in its 2015 CASM (cost per available seat mile) performance.

What to expect

For 2016, UAL expects its CASM excluding fuel to increase by 0.5% to 1.5% and from $10.18 to $10.28. Its fuel cost for 2016 is expected to decline to $1.25–$1.30 from $1.82 in 2015. This significant fuel savings can also help boost margins in 2016.

However, investors should remember that analysts are estimating margins to have peaked. Also, it is only a matter of time before fuel prices rebound as important economic production starts falling. Such events could adversely impact margins.

The PowerShares Dynamic Leisure & Entertainment Portfolio ETF (PEJ) invests 5% of its holdings in UAL. It also invests 5% of its holdings in Delta Air Lines (DAL), 2.7% of its holdings in Alaska Air Group (ALK), 2.5% in Allegiant Air (ALGT), and 2.4% in JetBlue Airways (JBLU).

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