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Can United Continental Continue to Improve Utilization?

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Aug. 24 2016, Updated 1:37 p.m. ET

Load factor improves

For July 2016, United Continental’s utilization (load factor) improved by 0.5 percentage point. This was expected, as capacity growth for the month was lower than the traffic growth in the same period.

The load factor, the most commonly used measure of an airline’s capacity utilization, is calculated by multiplying the capacity by the traffic. A higher load factor indicates better utilization of aircraft capacity. As shown in the above graph, throughout 2015, UAL’s load factor has remained volatile. For fiscal 2015, UAL’s load factor declined by 0.2%.

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Low fuel surcharges

Airlines have benefited immensely from falling crude prices. However, for legacy carriers, this has been a double-edged sword. While profitability has improved due to reduced costs, revenues have fallen due to declining fuel surcharges.

Increasing competition

Competition for seats is increasing as all airlines continue to add capacity. In fact, ultra-low-cost carriers Spirit Airlines (SAVE) and Allegiant Travel (ALGT) are pursuing aggressive capacity additions, adding to the pressure on legacy carriers UAL, Delta Air Lines (DAL), and American Airlines (AAL). UAL forms ~1% of the First Trust Large Cap Value AlphaDEX ETF (FTA).

Outlook

Between 3Q15 and 3Q16, UAL expects unit revenues (revenue per available seat mile) to decline by 7.5%–5.5%. Declining yields due to increased competition, the demand-capacity mismatch, and low fuel surcharges will continue to impact unit revenues.

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