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Why United Continental Got Downward Revision of 2016 Revenue

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Analyst estimates

For 2Q16, analysts are estimating United Continental’s (UAL) revenue to decline by ~5.8% YoY (year-over-year) to $9.3 billion. They estimate a 3% decline in 3Q16 and a 1.6% decline in 4Q16.

For 2016, analysts are estimating revenue to decline by ~4% to $36.0 billion. The expected decline is higher than the earlier estimate of a 2% decline to $37.0 billion in 1Q16 and a 0.61% decline to $37.6 billion in 4Q15.

It’s important to track analysts’ estimates since they can serve as a proxy for what the Market has priced in.

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Declining unit revenues

United Continental’s unit revenues declined 7% YoY in the first quarter of 2016. Unit revenue is revenue earned by an airline for flying one passenger for one mile. It’s also known as passenger revenue per available seat mile (or PRASM).

A strong US dollar and lower fuel surcharges due to rapidly declining crude oil prices continue to be the major reasons for declining unit revenues. Since UAL has significant international operations and earns revenues in local currencies, a strong dollar would translate to lower revenues.

Travel demand

Passenger travel demand is a major revenue driver for airlines. This year started off on a great note with good growth in travel demand. This helped airlines offset some impact from declining unit revenues. However, International Air Transport Association (or IATA) expects travel demand to slow down going forward, which means more bad news for airlines.

For a complete analysis, read Will Airline Industry Demand Rise for the Remainder of 2016?

What’s the outlook?

United Continental expects its unit revenue to decline 6.5%–8.5% YoY in 2Q16. Factors such as a strong US dollar, low fuel surcharges, and declining business from energy sector clients impacted revenues in 2015. Energy sector clients have a major hub in Houston that’s dependent on the oil sector. These factors are expected to contribute to UAL’s PRASM decline in 2016.

Almost all major airlines, including American Airlines (AAL), Delta Airlines (DAL), and Alaska Airlines (ALK), are expecting unit revenues to keep declining in 2016. UAL forms 2.2% of the PowerShares Dynamic Market ETF (PWC).

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