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United Beats Profit Expectations but Says Growth Will Slow

April 21, 2016, 8:55 AM UTC
The United Airlines terminal at Newark Liberty Airport.
Photograph by Spencer Platt—Getty Images

United Continental Holdings on Wednesday reported a first-quarter profit above analysts’ expectations and said it would slow its growth plans because flight capacity across the industry has exceeded passenger demand, pushing down prices.

The No.3 U.S. airline by traffic earned $313 million in the first quarter. On an adjusted basis, profit fell 25% to $435 million, or $1.23 per diluted share, in part because United began recording non-cash taxes.

Analysts on average estimated United (UAL) would earn about $420 million, or $1.18 per diluted share, according to Thomson Reuters I/B/E/S.

Despite the results, shares slumped nearly 3% in after-hours trade because the airline forecast that unit revenue would continue to sink from a year ago. United executives presented a bleaker picture of demand than rival Delta Air Lines (DAL) did last week, which had said average U.S. domestic fares were starting to rise.

“Demand is not growing at the level of industry capacity,” United’s Chief Revenue Officer Jim Compton said on a media call.

A collapse in oil prices continues to hurt bookings for travel from energy center Houston, one of United’s principal hubs. At the same time, a surge in flights from low-cost airlines such as Southwest Airlines Co and Spirit Airlines Inc continues to keep prices low compared to a year ago.

United said it expects passenger revenue as measured against flight capacity to decline between 6.5% and 8.5% in the second quarter. The closely watched financial measure fell 7.4% in the first quarter.

Sterne Agee CRT analyst Adam Hackel said the forecast was weaker than expected, noting that “the market was largely looking for unit revenue declines to start moderating” in the second quarter.

In response to soft demand, United said it has reduced plans to add flight capacity in 2016 by 0.5 percentage points, meaning it will grow between 1% and 2% compared to a year ago.

Cheap fuel has at least lowered United’s costs. The airline said its pretax profit margin was 8.4% in the first quarter, compared with 6.8% a year ago.

United said earlier Wednesday that it has shuffled its board in a settlement with activist investors who wanted new directors with airline expertise to take charge.

With the boardroom contest behind it, analysts say United can focus on closing the margin gap with Delta, which reported an 18.5% operating margin last week.