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UAL's investors say: 'Show me'
CHICAGO (The Wall Street Journal) - Investors are having a hard time figuring out the new United Airlines.
After an initial honeymoon following the carrier's Feb. 1 emergence from a prolonged stay in bankruptcy-court protection, investors appeared to sour on United's parent, UAL Corp. Pressure is on the company to produce stellar second-quarter results or risk losing credibility on Wall Street. UAL's new stock, which achieved a high of $43 a share in late March, hit a low of $26 early last month and then rose a bit. But it closed Friday on the Nasdaq Stock Market at $26.76, down 6.5 percent. The airline's disappointing first-quarter results, its high unit costs and its middle-of-the-pack revenue performance seemed to stifle earlier enthusiasm.
Some analysts have the stock at a "buy," others at "hold," and one at "reduce." Most agree the company didn't do enough to cut its costs during its 38-month stay in Chapter 11. Some think its strategy of offering a variety of services - from premium to budget - at a time when competitors are streamlining their operations is costly and flawed. There are concerns about discount king Southwest Airlines expanding service in Denver, a United hub, and planning to touch down Oct. 5 in Washington's Dulles International Airport, another United hub.
Making the bet even more difficult are questions about the airline industry as a whole: Will carriers be able to push through more fare increases? Will they maintain their disciplined capacity restraint? What will oil prices do? Will there be other combinations, following the merger last fall of US Airways Group Inc. and America West?
The June 30 quarter is typically stronger for airlines. Some of United's peers including AMR Corp.'s American Airlines, Continental Airlines and US Airways are expected to be solidly profitable in the period, and their shares have soared in anticipation. Merrill Lynch last week estimated that eight of the largest carriers would produce a total of $1.2 billion in quarterly net profit, the industry's first profitable quarter since September 2000. Still, it downgraded American, Continental and US Airways on the hunch that they have limited upside for now.
United could lose its remaining supporters on Wall Street if it doesn't fare better when it reports financial results late this month. "The frustration with United has been the company's inability to drive nonlabor costs lower," Lehman Brothers analyst Gary Chase said in a research note after a $306 million first-quarter loss, which excluded a huge accounting gain tied to its reorganization. "For this reason, we believe United has become a 'show me' situation for investors."
Nevertheless, Lehman rates the stock an equivalent of a "buy" and on Friday raised its second-quarter profit forecast to 65 cents a share from 40 cents a share on higher revenue expectations. The firm makes a market in UAL shares and owns more than 1 percent of its common stock.
In early May, when UAL announced its first-quarter results, it said it was dissatisfied with its controllable-cost performance. The carrier's cost to fly a seat a mile on one of its own jets rose 11 percent in the quarter, or 3 percent excluding costlier fuel, from a year earlier.
Helping costs go up were a 19 percent increase in purchased services such as outsourcing and post-bankruptcy professional fees, an 18 percent increase for maintenance and a 5 percent increase in salaries, driven by $69 million of stock-based compensation expenses related to awards of stock to management. UAL's top 400 managers will receive 9.8 million shares, 8 percent of the total, in restricted stock or stock options vesting over four years, with the first 20 percent vesting next month.
United said at the time that it would have more stock-based compensation expenses in the second quarter, along with higher maintenance spending and noncash expenses related to fresh-start accounting.
The company, with a market capitalization of about $2.8 billion, announced plans to cut $300 million from its expenses this year and $400 million more in 2007.
Last month, UAL said it would cut at least 1,000 salaried and management jobs, out of 9,400, by year's end to reduce general and administrative overhead by $100 million. That will add a severance charge of unknown magnitude to the second-quarter results.
UAL, the nation's No. 2 airline by traffic after American, said its planes were more than 88 percent full in June, a record for the month. But the carrier is being plagued by mediocre punctuality and occasional pilot shortages caused by scheduling problems.
The company has pledged to introduce more efficiency to its operations and vowed to advance some of the planned 2007 savings into this year.
But will it be enough? Two weeks ago, the average estimate of analysts surveyed by Thomson Financial saw the company earning just five cents a share in the second quarter. Now the average earnings forecast is up to 46 cents a share. Prospects for the third quarter, seasonally UAL's best period, are better.
"We know we have work to do, and we're doing the work," says Jake Brace, UAL's chief financial officer. Mr. Brace says some investors don't understand UAL's cash-generation power, which is being hidden by noncash charges related to its exit from Chapter 11. UAL's restructured balance sheet, minimal capital-expenditure requirements and limited debt obligations are helping the company generate large amounts of cash, which falls straight to the bottom line.
Glenn Tilton, UAL's chairman and chief executive, acknowledged last month that many investors are going to be watching earnings reports for the second and third quarters to serve as a "proof point" for the turnaround story the company is laying out.
Even some analysts who have upgraded the stock aren't enamored of the airline's story.
"United is pursuing a business model that has been proven ineffectual for over 20 years," Bear Stearns analyst David Strine said in a research note marking up the shares to the equivalent of "buy" from "peer perform." But "given all the negative news on United and a somewhat unclear message, we believe the first sign of improvement will be an important catalyst." Bear Stearns makes a market in UAL stock.
CHICAGO (The Wall Street Journal) - Investors are having a hard time figuring out the new United Airlines.
After an initial honeymoon following the carrier's Feb. 1 emergence from a prolonged stay in bankruptcy-court protection, investors appeared to sour on United's parent, UAL Corp. Pressure is on the company to produce stellar second-quarter results or risk losing credibility on Wall Street. UAL's new stock, which achieved a high of $43 a share in late March, hit a low of $26 early last month and then rose a bit. But it closed Friday on the Nasdaq Stock Market at $26.76, down 6.5 percent. The airline's disappointing first-quarter results, its high unit costs and its middle-of-the-pack revenue performance seemed to stifle earlier enthusiasm.
Some analysts have the stock at a "buy," others at "hold," and one at "reduce." Most agree the company didn't do enough to cut its costs during its 38-month stay in Chapter 11. Some think its strategy of offering a variety of services - from premium to budget - at a time when competitors are streamlining their operations is costly and flawed. There are concerns about discount king Southwest Airlines expanding service in Denver, a United hub, and planning to touch down Oct. 5 in Washington's Dulles International Airport, another United hub.
Making the bet even more difficult are questions about the airline industry as a whole: Will carriers be able to push through more fare increases? Will they maintain their disciplined capacity restraint? What will oil prices do? Will there be other combinations, following the merger last fall of US Airways Group Inc. and America West?
The June 30 quarter is typically stronger for airlines. Some of United's peers including AMR Corp.'s American Airlines, Continental Airlines and US Airways are expected to be solidly profitable in the period, and their shares have soared in anticipation. Merrill Lynch last week estimated that eight of the largest carriers would produce a total of $1.2 billion in quarterly net profit, the industry's first profitable quarter since September 2000. Still, it downgraded American, Continental and US Airways on the hunch that they have limited upside for now.
United could lose its remaining supporters on Wall Street if it doesn't fare better when it reports financial results late this month. "The frustration with United has been the company's inability to drive nonlabor costs lower," Lehman Brothers analyst Gary Chase said in a research note after a $306 million first-quarter loss, which excluded a huge accounting gain tied to its reorganization. "For this reason, we believe United has become a 'show me' situation for investors."
Nevertheless, Lehman rates the stock an equivalent of a "buy" and on Friday raised its second-quarter profit forecast to 65 cents a share from 40 cents a share on higher revenue expectations. The firm makes a market in UAL shares and owns more than 1 percent of its common stock.
In early May, when UAL announced its first-quarter results, it said it was dissatisfied with its controllable-cost performance. The carrier's cost to fly a seat a mile on one of its own jets rose 11 percent in the quarter, or 3 percent excluding costlier fuel, from a year earlier.
Helping costs go up were a 19 percent increase in purchased services such as outsourcing and post-bankruptcy professional fees, an 18 percent increase for maintenance and a 5 percent increase in salaries, driven by $69 million of stock-based compensation expenses related to awards of stock to management. UAL's top 400 managers will receive 9.8 million shares, 8 percent of the total, in restricted stock or stock options vesting over four years, with the first 20 percent vesting next month.
United said at the time that it would have more stock-based compensation expenses in the second quarter, along with higher maintenance spending and noncash expenses related to fresh-start accounting.
The company, with a market capitalization of about $2.8 billion, announced plans to cut $300 million from its expenses this year and $400 million more in 2007.
Last month, UAL said it would cut at least 1,000 salaried and management jobs, out of 9,400, by year's end to reduce general and administrative overhead by $100 million. That will add a severance charge of unknown magnitude to the second-quarter results.
UAL, the nation's No. 2 airline by traffic after American, said its planes were more than 88 percent full in June, a record for the month. But the carrier is being plagued by mediocre punctuality and occasional pilot shortages caused by scheduling problems.
The company has pledged to introduce more efficiency to its operations and vowed to advance some of the planned 2007 savings into this year.
But will it be enough? Two weeks ago, the average estimate of analysts surveyed by Thomson Financial saw the company earning just five cents a share in the second quarter. Now the average earnings forecast is up to 46 cents a share. Prospects for the third quarter, seasonally UAL's best period, are better.
"We know we have work to do, and we're doing the work," says Jake Brace, UAL's chief financial officer. Mr. Brace says some investors don't understand UAL's cash-generation power, which is being hidden by noncash charges related to its exit from Chapter 11. UAL's restructured balance sheet, minimal capital-expenditure requirements and limited debt obligations are helping the company generate large amounts of cash, which falls straight to the bottom line.
Glenn Tilton, UAL's chairman and chief executive, acknowledged last month that many investors are going to be watching earnings reports for the second and third quarters to serve as a "proof point" for the turnaround story the company is laying out.
Even some analysts who have upgraded the stock aren't enamored of the airline's story.
"United is pursuing a business model that has been proven ineffectual for over 20 years," Bear Stearns analyst David Strine said in a research note marking up the shares to the equivalent of "buy" from "peer perform." But "given all the negative news on United and a somewhat unclear message, we believe the first sign of improvement will be an important catalyst." Bear Stearns makes a market in UAL stock.
Rather like an out-of-date infomercial that never stops pursuing ways to annoy! 
