United Continental Holdings (UAL, Financial), one of three major airlines in the U.S., reported lower earnings during first-quarter 2017 compared to the prior-year quarter. The recent decline in the company's stock price was driven by poor interactions with its customers over the past few weeks. Despite this, the company’s stock price increased as it provided a strong revenue outlook for second-quarter 2017.
Company misses earnings guidance
United Continental reported net earnings of 31 cents per share, about seven cents lower than the expected earnings. Although the company’s total revenue increased 2.7% year-over-year, higher operating costs contributed to lower earnings. During first-quarter 2017, consolidated unit cost per available seat mile (CASM) increased 5.1% compared to first-quarter 2016. According to the earnings report, higher fuel expenses and the “impact of labor agreements ratified in 2016” contributed to the increase in operating costs.
Company had poor interactions with customers during the past few weeks
According to Business Insider, United removed a bridal couple from an airplane after failing to “follow crew member instructions to return to [the couple’s] assigned seats.” This worsened the airline’s reputation in regard to customer service, especially after the incident that took place April 13 where a passenger was forcibly removed from a full flight. In the earnings report, CEO Oscar Munoz described the incident as a “humbling experience” and a “watershed moment” for United. Management also discussed the company's plans to put their customers at the center of their operations and set the standard for customer service among the competition.
Strong revenue outlook boosts stock price
Surprisingly, the company’s stock price rebounded to $70.53 per share, trading approximately 2.11% higher than its previous close of $69.07 per share.
While the company reported flat passenger revenue per available seat mile in first-quarter 2017 compared to first-quarter 2016, management gave a solid revenue outlook for second-quarter 2017. In the earnings report, President Scott Kirby said he expects the company’s consolidated PRASM to increase 1% to 3%, which “would mark the fifth straight quarter of sequential improvement” in the company’s revenues.
Warren Buffett (Trades, Portfolio) currently owns about 29 million shares of United Continental, the largest stake among gurus. PRIMECAP Management (Trades, Portfolio) has the second-largest stake with about 19.73 million shares.
Disclosure: No position in the stock mentioned.
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