U.S. Regional carrier United Continental (NYSE:UAL) reported its second-quarter results on Tuesday after the bell. The firm reported earnings-per-share of $3.23 on revenue of $10.78 billion, compared to analysts expectations of $3.05-per-share on revenue of $10.70 billion. The earnings beat took the stock nearly 4% higher in after-hours trading as investors took the firm’s positive second quarter results as a sign of resilience despite recent worries about worsening conditions in the airline industry. 

Perhaps the most important metric from UAL’s earnings report was the passenger revenue per available seat mile, which increased 3% from the year-ago quarter. That represents an improvement from the firm’s first-quarter results, which showed a 2.7% increase in passenger revenue from the previous year. Unit costs per available seat mile also increased by 7.1% over the past year, a worrying trend for the airline. However, investors appeared to take comfort in the fact that per-seat passenger revenue was also on the rise.

As fuel costs continue to weigh on airline operations, UAL will have to continue to increase its per-passenger revenue in order to offset the expenses and increasing unit revenues suggest that UAL has been able to hold on to its pricing power even in a difficult environment.

A bright spot from the results showed that costs per available seat miles excluding special charges, third-party business expenses and most notably fuel expenses, decreased by 0.4%. That suggests that the company’s operational efficiency is improving, an important step for UAL as fuel costs rise and dig into profits. 

Industry Trouble

Although we’ve seen demand for air travel rise significantly in recent months, rising oil prices have weighed significantly on the industry as a whole. Not only will higher fuel prices take airlines’ expenses higher, but many worry that as the costs are passed on to customers, it will pull demand lower as well — a double hit for companies like UAL.

Not only are fuel costs a worry for the airline industry, but higher labor expenses are also likely to make an impact on airlines’ bottom line. 

While UAL appears to be battling the rising cost of fuel by improving operations, it’s important to note that the company has a worrying amount of debt, giving it less wiggle room should conditions continue to worsen. United has a debt-to-equity ratio of 158.17% — much higher than peers like Delta Airlines (NYSE:DAL) and Southwest Airlines (NYSE:LUV). 

CEO Oscar Munoz praised the firm’s ability to thrive despite rising fuel costs and said the strong second-quarter results are a good sign that the company’s strategic growth plan is working and assured traders that the company will be able to carry this momentum through the second half of the year. The company updated its full-year guidance saying it expects to see EPS of between $7.25 and $8.75.

Looming Questions

United is expected to hold a conference call to discuss the second-quarter results on Wednesday morning where questions regarding the firm’s future are likely to be answered.

Traders are likely to be interested in an update on the firm’s growth strategy as earlier in July, the airline cut a number of its small-city flights out of Chicago. The move caused many to question whether UAL’s plans to expand by focusing on small and midsize cities was paying off.

Another big question mark for investors is how the trade tension between China and the U.S. is expected to affect the airline. So far, United management has said the issues haven’t impacted airline travel demand, but some worry that if tension between the U.S. and China continues to escalate the industry will eventually suffer.

The Bottom Line

All in all, the UAL results were not only a positive for the company but injected some optimism into the industry as a whole. Moving forward, fuel costs will remain a top concern for investors, but so far it looks like United is handling the ballooning costs effectively. Of course, if oil prices make their way markedly higher, the entire industry is likely to suffer — something UAL will probably feel more than its peers because of its already lofty debt obligations.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities. 

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