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Over the past year or so, I've been rather skeptical about United Continental's (NYSE: UAL) plan to boost its earnings by accelerating its growth rate, particularly in smaller cities. Yet the company's year-to-date results show that its strategy is working.
Indeed, United Airlines released another strong earnings report on Tuesday afternoon and raised its full-year guidance for the third consecutive quarter. It now expects to post full-year adjusted earnings per share of $8.00 to $8.75 -- up from an initial guidance range of $6.50 to $8.50 -- even though it is on track to spend an extra $700 million on fuel compared to its original forecast.
United Continental's EPS soared last quarter. Image source: United Airlines.
This strong 2018 performance has helped United surpass American Airlines in terms of profitability. Catching up to Delta Air Lines (NYSE: DAL) could be a trickier task to pull off, though.
Another strong earnings report
Back in July, United Airlines projected that it would achieve a pretax margin between 8% and 10% for the third quarter on a 4% to 6% increase in passenger revenue per available seat mile (PRASM). However, United updated its forecast last month, stating that unit revenue would come in near the high end of its forecast range.
Sure enough, PRASM rose 6.1% last quarter. As a result, adjusted pretax margin reached 9.7%, even though fuel costs came in at the upper end of United's guidance range. Adjusted earnings per share surged 36% to $3.06, helped by the combination of an easy year-over-year comparison and tax reform benefits.
The fourth quarter outlook is strong, too. United Airlines expects PRASM to rise 3% to 5%, while adjusted nonfuel unit costs should be flat to down 1%. Adjusted pretax margin is set to come in between 5% and 7%, compared to 6.7% in the year-ago period.
Delta still shines brighter
United Airlines has certainly made substantial progress toward becoming more competitive this year. It is also recapturing virtually the entire year-over-year increase in its fuel costs. That said, its financial performance still doesn't compare to that of Delta Air Lines.
Last quarter, Delta's adjusted pretax margin was 13.5%: nearly 4 percentage points ahead of what United achieved. Year to date, United Airlines has earned an adjusted pretax profit of $2.4 billion, compared to $3.9 billion for Delta. (The two companies are similar in size; United is slightly larger in terms of capacity, but Delta generates more revenue.) This also equates to a pretax margin gap of around 4 percentage points.