Weather, Fuel Prices... And Labor Issues... To Blame

A fierce weather system over the busy holiday travel season conspired with high fuel prices and labor discord to send profits at United Airlines parent UAL tumbling for the fourth quarter of 2007. The airline chalked up $53 million in losses, equivalent to a per-share drop of 47 cents.

That amount was a lot less than expected, reports USA Today; a survey conducted by Thomson Financial predicted a loss of 89 cents per share. It's also less than the $61 million United lost during the same period in 2006... but still marks a downward shift in airline profits, as increasingly turbulent economic conditions hit US domestic airlines hard.

Revenue for the nation's second-largest carrier was up 9.7 percent, to $5.03 billion. Higher ticket prices contributed to much of that increase, but still weren't enough to offset record prices for Jet-A. United said its fuel prices increased $359 million in the fourth quarter.

United blamed poor December weather for the cancellation of some 2,350 flights... but that excuse didn't fly with at least one analyst, who placed a spotlight on the airline's increasingly hostile relationship with its workforce. As ANN reported, Soleil Securities Group analyst James Higgins told investors earlier this month of "rising evidence" that organized 'sick-outs' by pilots contributed to the airline's abysmal performance in December, which saw United rack up twice the industry average number of delays.

"We believe UAL management's view that weather was a key factor behind the many December flight cancellations, but also think pilot behavior exacerbated the situation," Higgins said. "The pilots' anger is manifesting itself in several ways. Most notable is a perfectly legal refusal to accept flying beyond amounts specified in their contract. We also believe UAL is facing increasing pilot sick calls, among other actions that hurt operations and earnings."

Despite its Q4 losses, United was still able to scrape together a net income of $403 million for all of 2007, marking the airline's first full-year profit since 2000.

In a message to employees, United CEO Glenn Tilton said the airline "made real progress in 2007," citing an operating profit of about $1 billion for 2007. The airline's operating margin more than doubled, he added.

"We made significant financial strides in 2007 -- delivering among the best revenue and free cash flow performance in the industry, paying down more than $2 billion of debt and continuing our focus on cost control," added Chief Financial Officer Jake Brace.

In a move unlikely to win any more favors from United employees, however, the airline plans to distribute $250 million to shareholders Wednesday. Labor unions have already expressed their anger at that plan, saying United should be sharing profits with its workers who took heavy pay cuts under bankruptcy.

J.P. Morgan analyst Jamie Baker notes United appears to be heading towards an even bigger loss for the first quarter of 2008... but adds United is in a good position to offset some of that loss, by trimming capacity.

"We view United's ability to further downsize as better than most, with an estimated 100 aircraft or so either unencumbered or coming off lease," he said. "Additionally, United's pilot contract does not appear to imperil its ability to shrink should conditions warrant."

And, of course, if that fails... there's always the possibility of a merger. Curiously, that's a subject Tilton -- a fierce proponent of industry consolidation -- avoided bringing up in United's earnings announcement.

FMI: www.united.com