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UAL woes hurt air stocks
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September 29, 2000: 1:47 p.m. ET
Largest airline sees 3Q loss possibly extending to 4Q as well
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - United Airlines' corporate parent warned it will post a loss in the third quarter and probably the fourth quarter as well, sending its stock and the stock of most major airlines into a tailspin Friday.
UAL Corp. blamed high fuel costs, disruption in flights during contract negotiations with its pilots union and the resulting loss of passengers, and the financial impact of the contract agreement as the reason for the expected losses.
"While we are pleased that we were able to reach a tentative pilot contract, the financial implications of the agreement, coupled with the higher price of jet fuel, will further impact our results," said James Goodwin, CEO of the employee-owned airline, the world's largest air carrier. "Therefore, we expect to post a loss in the third quarter and probably in the fourth quarter as well."
 UAL did not specify the extent of the expected loss in either period. Analysts surveyed by First Call had expected the company to report earnings of 97 cents a share in the third quarter and 63 cents a share in the fourth quarter.
Those estimates already had been lowered after the company warned twice since July that it would miss previous guidance in the third quarter due to the flight disruptions. Last year, the company earned $3.75 a share in the third quarter and $1.91 a share in the fourth.
None of the analysts had been expecting a loss this year.
"The traffic was much weaker than anyone was expecting," said Ray Neidl, analyst with ING Barings. "My guess is no one knows for sure how bad it was, including the company."
Neidl said UAL officials have been telling analysts that they were underestimating the cost of the tentative agreement reached with the pilots Aug. 26. The contract gives immediate pay increases of 21 to 27 percent to make up for lack of raises over the last six years, when pilots paid for their 25 percent stake in the carrier with reduced wages.
UAL has not disclosed the total cost of those lump sum payments, but they are part of the reason for the loss warning, company spokesman Joe Hopkins said.
Michael Linenberg, airline analyst for Merrill Lynch, estimates the recent labor agreements could boost expenses by several hundred million dollars. For every $100 million increase in expenses, earnings per share would be cut by 50 cents, he said.
"Further exacerbating labor costs is the fact that the annual wage rate increases going forward, at least 4.5 percent per annum for the pilots through May 2004, came in at the very high end of our range," he said.
Linenberg reduced his long-term recommendation on UAL stock to accumulate from buy. Neidl already had a hold recommendation on the stock, which he retained.
United had to cancel thousands of flights during labor negotiations as pilots refused to fly overtime. Those cancelled flights caused passenger defections to other carriers, according to analysts.
Neidl said he thinks United can recover some of the customers it lost by the first quarter of next year. He also thinks the hit taken by other airline stocks Friday morning in the wake of the report is an overreaction by the market.
"I think it's an UAL-specific problem," he said. "Others are saying traffic numbers are fine." Overall earnings estimates for the other carriers have been edging lower due to fuel costs, Neidl said, but not to the magnitude of the UAL earnings collapse.
Shares of UAL (UAL: Research, Estimates) fell $2.31, or 5.3 percent, to $41.69, in trading Friday, but all the major airlines also were lower.
Of the next five largest carriers, American Airline parent AMR Corp. (AMR: Research, Estimates), Delta Air Lines (DAL: Research, Estimates), Northwest Airlines (NWAC: Research, Estimates), Continental Airlines (CAL: Research, Estimates) and US Airways Group (U: Research, Estimates), all but Continental were off at least 4.5 percent. Continental shares were off 88 cents, or 2 percent, to $45.13. 
-- Click here to send e-mail to Chris Isidore
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UAL Corp.
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