United Has Seen 22,500 Flight Cancellations Already in 2014, Guess About Guidance

Jon C. Ogg

Airline stocks have soared higher and higher. The age of consolidation is allowing the airlines to charge whatever they want, but 2014 is getting off to a rough start – a very rough start. United Continental Holdings, Inc. (NYSE: UAL) submitted an SEC filing disclosing that severe weather has caused the airline to cancel more than 22,500 flights!

United Continental also said that the largest number, roughly 20,000 or so, were regional flights. If this number sounds huge, it should. This effectively represents almost four-times the cancellations during the first two months of 2013.

United Continental is now lowering capacity guidance as a result in the system available seat miles. The company had previously offered an investor update on January 23, 2014, and the current first quarter capacity expectations are as follows:

  • Mainline at -0.4% to 0.6%
  • Regional  at -1.3% to 0.3%
  • Consolidated at -0.6% to 0.4%

The filing said,

“Due to the severe weather, United’s combined January and February 2014 month-to-date regional completion factor is 87.1%, nearly 9 points lower than its mainline completion factor, an extraordinary low level. Due to the shorter stage length of regional flights, regional passenger revenue per available seat mile (“PRASM”) is typically almost twice as high as mainline domestic PRASM. Consequently, the reduction in regional flying has had a disproportionate effect on United’s consolidated PRASM. The weather-related cancellations to date have reduced first quarter 2014 consolidated PRASM by approximately 1.5 percentage points.”

The story gets worse than just the weather. United Continental said that on top of bad weather in the first two months, its March yields have weakened. The blame is partly due to a larger than expected shift in Easter and spring break demand from March to April.

The final guidance was quoted as being,

“Finally, the Company periodically reviews ticket breakage rates. During the quarter, the Company decreased its estimate for future ticket breakage rates, which the Company expects will further reduce its first quarter 2014 consolidated PRASM by approximately 0.5 percentage points… As a result of the above, the Company now expects first quarter 2014 consolidated PRASM to decrease between 0.5% and 2.5% year-over-year.”

Thursday’s SEC filing did not signal how much of the revenue losses would be made up by insurance. UAL shares closed down 0.6% at $46.51 on the day, and this stock was down another 3% around $44.95 in the after-hours trading session on low volume. Keep in mind that United Continental has traded in a range of $26.58 to $49.20 over the last 52-weeks.

Airline stocks used to trade at 5-times expected earnings, then at 8-times expected earnings. United’s closing price on Thursday of $46.51 was at roughly 10-times expected earnings (of $4.60 per share) for 2014. These multiples are almost certainly going to be much higher than their historic valuations now that all of the power is in the few surviving carriers.