United sees profit below estimates as deep discounts sting

United Airlines Holdings Inc. said third-quarter profit will fall short of Wall Street’s expectations as US carriers slash ticket prices to lure domestic travelers, keeping even the industry’s largest players from fully capitalizing on record summer travel.

Adjusted earnings will be $2.75 to $3.25 a share in the current period, the company said in a filing Wednesday that also included second-quarter results. Analysts were expecting $3.38 on average in estimates compiled by Bloomberg.

United echoed rival Delta Air Lines Inc. in warning that price cuts by low-cost carriers struggling to fill an excess of seats this summer are weighing on the entire industry. Domestic-focused discount carriers added too many seats earlier this year that they are now trying to fill by dropping fares, pushing bigger rivals to follow suit to remain competitive.

Revenue last quarter from bare-bones basic economy fares rose 38% at United, compared with an 8.5% increase in premium sales.

Alaska Airlines Group Inc. offered a similar outlook Wednesday, forecasting third-quarter and full-year profits below analyst estimates in large part due to price cuts.

United shares were little changed after the close of regular trading Wednesday while Alaska’s stock declined 2%. American Airlines Group Inc., which is expected to report earnings next week, slipped 1.5%.

Southwest Airlines Co. sounded an earlier alarm, reducing its estimate for second-quarter unit revenue last month, citing problems adapting to “current booking patterns.” American slashed its profit and sales expectations in late May after it misjudged domestic demand, and discounter Spirit Airlines Inc. said July 16 that second-quarter revenue would fall short of its earlier projections.

‘Inflection Point’

Fare cuts could wane after mid-August, when published flight schedules show an almost 3 point decline in the industry capacity growth rate, United said. The airline said it plans to remove 3 points from its own domestic capacity in the fourth quarter, without providing more detail.

“United has long been preparing for the moment when industry wide domestic capacity would adjust — it’s now clear that inflection point is just 30 days away,” Chief Executive Officer Scott Kirby said in the earnings statement.

United’s adjusted second-quarter profit of $4.14 a share topped the $3.93 average from analyst estimates. Revenue was roughly in line with expectations for $15 billion. The company maintained its projection for full-year earnings of $9 to $11 per share.

“The third-quarter guidance was a curve ball, but we believe in this management team to execute,” TD Cowen analyst Thomas Fitzgerald said in a report. United is among the carriers best positioned to gain “significant” market share as domestic-focused airlines retreat, he said.

Separately, Alaska said third-quarter adjusted earnings will be $1.40 to $1.60 a share, less than the $2.06 estimated by analysts. The airline also narrowed its full-year profit outlook to between $3.50 and $4.50 per share, bringing the midpoint of that range to $4, less than the $4.52 that analysts had expected. 

The lowered outlook is “entirely driven by this modest revenue reduction versus our original expectation,” Alaska Chief Financial Officer Shane Tackett said in an interview. 

It also reflects a “slightly more expensive” labor agreement to be voted on by flight attendants, he said. Alaska expects less need for discounting once carriers trim capacity after August.