UAL records $779 million 3Q loss on fuel

United parent UAL reported a $779 million third-quarter loss on Tuesday, by far the biggest airline loss of the season. In the same quarter it suffered from both expensive jet fuel and accounting charges due to falling oil prices.

The nation's second-biggest carrier said capacity cuts and charges for things like checking luggage should help make it profitable again.

Fees for things like luggage are here to stay, said John Tague, United's chief operating officer. He said customers have been frustrated as they get used to that, but the business has to be run in a way to make a profit.

"And if that means the business has to be smaller in order to drive to that outcome, so be it," he said on a conference call. "So I mean, these are just things that are going to be necessary if we're going to be a real industry."

Like other carriers, United has been making moves like dropping underperforming routes, adding fees, and generally cutting capacity. On Tuesday the airline said it has switched its U.S.-to-China flights from 747s to smaller 777s, and that over the winter it would stop flying daily from Washington to Beijing. It is also dropping its service from Los Angeles to Hong Kong and from Denver to Heathrow airport in London.

Some of that capacity will come back on new flights such as Washington-to-Dubai, which begins next week. And it said it would add a flight from Washington to Moscow in March.

United cut distribution costs - such as payments to sellers of its tickets - by $30 million during the quarter. Tague said it is aiming to reduce that number more, and recently stopped paying commissions in Japan.

"We simply can't continue to be the only guy sitting in the room that isn't making any money off of people flying, so we're going to have to have more responsible discussions with all of our suppliers throughout the chain and we intend to continue to do that," he said.

Glenn Tilton, chairman, chief executive and president of United parent UAL Corp., said the airline is aiming to return to profitability, although the company didn't predict when.

"It is in this environment of falling oil prices that we at United see opportunity," he said.

The Chicago-based carrier lost $6.13 per share, compared with profit of $334 million, or $2.21 per share, a year ago.

The loss was due to oil's ups and downs during the July-through-September quarter. Oil prices peaked at more than $147 per barrel in July and averaged $118 per barrel during the quarter, United said - enough to drive its fuel bill higher by $946 million year-over-year. But oil's decline by the end of the quarter forced UAL to record a non-cash charge of $519 million for underwater fuel hedges that will expire in future quarters. Hedges that expired during the quarter brought in a gain of $17 million.

UAL said it would have lost $252 million, or $1.99 per share, if not for the hedges and other accounting charges.

Revenue edged up 0.7 percent to $5.57 billion.

The results beat estimates of analysts surveyed by Thomson Reuters, who expected a loss of $2.48 per share on revenue of $5.54 billion. Shares rose $1.13, or 8.9 percent, to close at $13.80.

United expects costs for each seat flown to rise 2.5 percent to 3.5 percent in the fourth quarter.

JPMorgan analyst Jamie Baker wrote that he had been skeptical that United could contain costs that much as it cut capacity, but he viewed the new guidance as encouraging.

"While falling slightly short of our 1.5 percent estimate, we are nonetheless impressed (assuming they deliver), considering a mixed track record for expense control," he wrote.

He said United's fourth-quarter guidance suggests it might nearly break even. Analysts on average expect a loss of $1.43 per share.

United ended the quarter with about $2.9 billion in cash. It brought in $300 million by borrowing against its planes in the third quarter, and it isn't done yet. It said it has 43 more planes worth another $3 billion that it currently owns debt-free, although executives did not say how much of the fleet it wants to use as collateral right now.

United said it now expects overall capacity to shrink 8 percent to 9 percent during 2009. That includes cutting domestic capacity 12.5 percent to 13.5 percent and international capacity 7 percent to 8 percent.

For the first nine months of 2008, United lost $4.05 billion, or $32.34 per share, versus profit of $456 million, or $3.10 per share, during the first three quarters of 2007. Revenue rose 3.5 percent to $15.65 billion.