United Posts Smaller Than Expected Loss

October 21, 2008

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United Airlines parent UAL posted a quarterly loss due to July's record-high energy prices and a drop in the value of its fuel hedges as the price of oil later dropped, but the results were not as bad as expected, and the company's shares rose more than 10 percent.

The carrier suffered an additional non-cash loss of USD$519 million, however, as its hedges -- designed to blunt the impact of rising fuel -- lost book value as oil began a rapid descent.

"While oil prices are lower in recent weeks, they continue to be volatile," UAL chief executive Glenn Tilton said in an email to employees.

"That said, the convergence of falling oil prices with our capacity flexibility, strong improvement on costs and competitive revenue put us in a position to make our margin and return United to profitability," Tilton said.

The airline industry has been battered by high fuel costs, which peaked alongside crude oil as it notched a record high in July. Oil has fallen about 50 percent since it touched its high.

Nevertheless, airlines are rapidly downsizing to offset fuel bills. UAL, which intends to reduce its domestic capacity by 14 percent in the fourth quarter, is cutting 7,000 jobs from its work force of 55,000.

Capacity cuts and falling fuel prices have blunted the impact of a weakening economy on airlines. Some experts have warned that travel demand could weaken further as travel budgets shrink.

UAL said its third-quarter net loss amounted to USD$779 million, compared with a year-earlier profit of USD$334 million.

Calyon Securities analyst Ray Neidl said it was difficult to forecast UAL's results for the quarter because capacity cuts began to impact the revenue the airline earned on each seat flown.

UAL said its hedge-related loss amounted to USD$519 million, but noted that it saw a cash gain of USD$17 million on contracts that settled during the third quarter.

Other airlines also have reported book losses on hedge portfolios. Last week, Southwest Airlines, well-known as the best-hedged US airline, wrote down USD$247 million in mark-to-market losses on the value of its fuel hedges.

"Airlines would love to take those types of charges in exchange for cheaper fuel," Neidl said.

UAL said its operating revenue rose 0.7 percent to USD$5.57 billion from a year earlier. Its fuel bill rose 64.8 percent.

The company ended the quarter with an unrestricted cash balance of USD$2.9 billion.