United Continental Holdings Inc. on Tuesday outlined plans to boost profitability with another round of cost cuts and efforts to woo back corporate fliers who have deserted the third-largest U.S. airline by traffic.
United aims to lift revenue, improve efficiency and trim expenses by a cumulative $3.1 billion between 2015 and 2018 as part of a broader effort by Chief Executive Oscar Munoz to reshape a company that some analysts have said requires bigger reforms to close its profit gap with rivals.
United, which is the largest airline at Denver International Airport, also said its closely watched average fare metric will be at the higher end of prior guidance in the second quarter, though investors will have to wait until the fourth quarter for an investor day with potentially more wide-ranging moves that analysts said could include changes to its route network and long-term financial goals.
The improved near-term revenue outlook helped lift United shares by nearly 3 percent to $44.64 in morning trade ahead of a call to discuss the planned changes with analysts.
Munoz had set a nine-month time frame for a strategic review following his appointment as CEO last September, but this slipped after he suffered a heart attack the following month. A spat with activist investors this year that concluded with the turnover of half its board has added to the delay.
United has struggled since its creation. Its 2010 merger established an airline with one of the best route networks alongside a host of challenges, including operational problems that delayed and canceled flights, poor labor relations and higher costs compared with American Airlines Group Inc. and Delta Air Lines Inc.
Chicago-based United has improved its on-time flying and brokered deals with some of its unions, and though the gap between its profit margins and those at American and Delta halved to around 2.4 percentage points in 2015 compared with the prior year, the divide has started to widen again, according to analysts at Wolfe Research LLC.
United aims to secure almost half of the financial improvements — some $1.5 billion over the three years — by securing additional revenue and higher fares by better segmenting its passengers according to their willingness to pay. Additional cost-savings will come from efforts such as installing slimmer seats and “upgauging” to increase aircraft capacity, United said.
The upgauging, which includes moves such as replacing smaller jets with larger aircraft, does come with some risks, Munoz said during Tuesday’s call. Frequency options may decline for customers, he said.
United also intends to continue “rebalancing” its capacity — measured by available seat miles, or one seat flown 1 mile — to align with demand, Munoz said. Earlier this year, United shifted capacity to Denver and San Francisco from Houston.
Some analysts are skeptical about the $3.1 billion goal, given that Delta in particular has made greater strides to improve its on-time flying and onboard service, in addition to offering a greater range of fares such as stripped-down ticket prices aimed at fending off discount carriers like Spirit Airlines Inc. and Denver-based Frontier Airlines.
While United is trying to improve the transparency of its turnaround plan, the limited changes announced Tuesday come at a time when investor sentiment toward airlines remains fragile.
U.S. airlines are this year expected to top 2015’s record profits, but investors are concerned the windfall of lower oil prices is being dissipated by carriers adding too much capacity and losing control over pricing.
Falling ticket prices have left a closely watched measure of per-passenger revenue in decline for more than a year, and investors continue to move out of airline stocks.
United said its passenger revenue per available seat mile was expected to be at the top end of prior guidance, forecasting a decline of 6.5 percent to 7.5 percent in the second quarter compared with a year earlier.
Alongside the efforts to boost revenue, United aims to cut $1.3 billion in costs over the next three years, the majority of it from continuing to shift more flying to larger planes from less-efficient regional jets.
Denver Post Staff Writer Alicia Wallace contributed to this report.
