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Why Analysts Think UAL’s Revenue Will Improve in 4Q16

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Jan. 12 2017, Updated 9:08 a.m. ET

Analyst estimates

In 4Q16, analysts are estimating United Continental’s revenue (UAL) to fall ~1.1% year-over-year (or YoY) to $8.9 billion versus an earlier estimate of a 3.2% fall. That means that for the full year 2016, analysts are estimating revenue to fall ~3.8% to $36.4 billion. However, this is expected to change in 2017. For the full year 2017, revenue is expected to grow 2.6% to $37.4 billion.

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

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Unit revenues to improve

United Continental’s unit revenues fell 7% year-over-year in 1Q16, 5.2% in 2Q16, and 5.8% in 3Q16. This was at the lower end of United’s forecast of 5.5% to 7.5%. A better unit revenue performance has led to United’s stock gaining almost 39% in the last three months.

Unit revenue is the 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 heavily declining crude prices continue to be major reasons for declining unit revenues. As UAL has significant international operations and earns revenues in local currencies, a strong dollar would translate to lower revenues.

Outlook

United Continental, however, does expect unit revenue to improve in the third quarter. It expects unit revenues to decline by just 1.3% to 1.8% YoY in 4Q16. This is a significant improvement as compared to its earlier guidance of a 4%–6% decline. This improvement was partly due to higher yields in both November and December and also better-than-expected demand before and during the holiday season.

As most airlines now seem to be conscious about capacity addition, unit revenue trends are expected to increase across the industry. Spirit Airlines (SAVE), Delta Air Lines (DAL), and Alaska Airlines (ALK) are expecting unit revenues to continue to fall in 2016.

UAL forms 2.6% of the PowerShares Dynamic Market Portfolio (PWC).

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