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United swoons as growth plan sparks new clash with Wall Street

January 25, 2018 GMT

United Continental Holdings’ plan to grow its way to better profits led to another rocky encounter with Wall Street.

At a presentation in New York this week, president Scott Kirby said an accelerated expansion would pay off in the long term by boosting market share at United’s major hubs in Chicago, Houston and Denver. He and CEO Oscar Munoz are doubling down on a strategy of adding flights and using bigger jets on some routes to win back customers and, eventually, increase profits.

But investors, wary of the potential for reviving a fare war, signaled they aren’t willing to endure another year of weak earnings as United tries to catch up to rivals. Analysts pressed Munoz and Kirby to explain when they would follow through on a vow to expand profit margins, after more than a year since United adopted its aggressive approach.

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“2017 was supposed to be the transition year,” Jamie Baker, an analyst at JPMorgan Chase, told the executives. The company’s 2018 outlook “implies another year of margin contraction.”

The exchange at the investor meeting evoked an even testier standoff in October, when Munoz and Kirby failed to reassure investors that they would firm up pricing power and rein in costs.

That time, United plunged 12 percent, the most in eight years. On Wednesday, the shares tumbled 11 percent to $69.05. That derailed the airline’s recent rally, the biggest among major carriers since the October swoon. American Airlines Group and Delta Air Lines also dropped sharply after United’s growth forecast.

Kirby said United would boost seating capacity by 4 percent to 6 percent this year, surpassing its 3.5 percent growth last year. United plans a similar pace of expansion in the next two years as well, Kirby said. All of those extra seats will come at United’s major airports to make them more competitive with American and Delta’s fortress hubs.

While United benefits from lucrative international operations at its coastal redoubts in San Francisco and Newark, N.J., profit margins at its mid-continent hubs - Chicago, Houston and Denver - trail rivals by 10 percentage points, Kirby said.

Adding flights connecting big airports with smaller cities is “the magic elixir,” Kirby told analysts gathered in New York. More flights on those routes should enable United to tap markets that tend to have higher fares than service between hotly contested major markets.

“We spent years shrinking while our competitors were growing” Kirby said. “We’re not going to accept a 10-point margin gap.”

The challenge is in the short term. The capacity increase will cut gains in a key gauge of pricing power, passenger revenue per available seat mile, by half a percentage point, United said.

Munoz offered reassurance by challenging investors to hold him accountable to meet new long-term earnings targets. The carrier projected earnings of $6.50 to $8.50 a share this year, compared with the $7 average of analyst estimates compiled by Bloomberg. Profit will rise to $11 to $13 a share by 2020.