United expects $3.1 billion a year from no-frills airfare, fewer delays

By Jeffrey Dastin

(Reuters) - United Continental Holdings Inc (NYSE: UAL) will generate billions of dollars from no-frills fares, fewer delayed flights, cost cuts and other efforts, the airline said on Tuesday.

The announcement, which sent United shares up nearly 3 percent, detailed some plans to catch up to larger rival Delta Air Lines Inc (NYSE: DAL).

United said it expected an extra $3.1 billion in operating income per year by 2018 from the programs, although rising wages, fuel and airport costs would partly offset that.

The company also said passenger unit revenue would fall 6.5 percent to 7.5 percent in the second quarter from a year earlier, compared with earlier expectations for a drop of as much as 8.5 percent, as sales to Latin America, Europe and the Middle East have been higher than expected.

The estimate of the operating income gain marks a new push by United for transparency with investors, who have sought details on how it intends to match Delta in on-time arrivals, satisfaction scores and profit margins. The plans themselves are not new.

"Acknowledging where we went wrong is an important step in our recovery," Chief Executive Officer Oscar Munoz said on a conference call. United has higher costs than peers, "some of which is structural and much of which is under our control."

Lower U.S. capacity on United has meant a smaller choice of flight times for corporate travelers, which has pushed them away, Chief Revenue Officer Jim Compton said.

United has begun to win customers back with fewer delays this year, Munoz said. Increasing aircraft use and having to place fewer customers on other carriers' flights when theirs are canceled will create a $300 million annual benefit, the company said.

Munoz said United in coming months would refine its strategy, such as how often it flies from Houston, where oil industry clients are spending less on travel.

He intends for United to innovate rather than follow rivals, but a nearly five-month medical leave and board battle afforded him little time to plan since he became CEO in September.

The company expects $1.5 billion of the benefit to come from ongoing airfare plans, including about $150 million from cheaper ticket offerings that may disallow advance seat assignments. This follows Delta's similar move to compete against discount rival Spirit Airlines Inc (NASDAQ: SAVE).

In a research note, JPMorgan analyst Jamie Baker said targets for the airfare efforts were achievable, but others might prove difficult to track.

(Reporting by Jeffrey Dastin in New York; Editing by Lisa Von Ahn)

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