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Fuel Efficient Jets Help World’s Largest Airline Cut Annual Costs by $2 Billion

In a filing today, United Continental Holdings Inc. (UAL), the world’s biggest airline, explained its plans to cut annual spending by at least $2 billion by 2017.

Half of the planned cost savings will be made by lowering fuel expenditure. Fuel consumption will fall seven percent over the four years as UAL decides to overhaul its fleet, introducing newer, more efficient planes such as the Boeing 787 Dreamliner, or by updating existing aircraft with winglets that help to drastically improve fuel efficiency.

Boeing 787 Dreamliner.
Boeing 787 Dreamliner.

In recent years UAL has struggled to control its costs that have risen faster on a seat per mile basis, than the revenues it earns for those same seats. During the last quarter its profits had fallen below that of competitors. According to Bloomberg, during the third quarter of the year, the airlines pre-tax margin was 5.8%, less than the 11.5% of Delta Air Lines, 9.5% at US Airways Group, and 9.2% at Southwest Airlines Co.

Jeff Smisek, the Chairman and Chief Executive Officer at UAL, said that they are “very confident we’ll deliver. We believe that we can deliver for you, our investors, multiples of our current earnings.”

As well as cutting fuel costs by $1 billion, United also hopes to reduce maintenance costs by $100 million a year, and improve employee efficiency in order to avoid another $500 million in costs. An extra $150 million will be saved by clever sourcing, and $100 million by optimizing the distribution channels through which it currently sells its seats.

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On top of the planned cuts, UAL intends to increase its revenues from other sources by around $700 million a year, with a total $3.5 billion to be generated by 2017 through adding new purchase options for customers and increasing the prices of existing products.

Smisek said that they’re “very focussed on that over the four-year period and we’re focused on generating free cash flow so we can do what we should do, which is return cash to our shareholders.”

One area where the airline has suffered recently is the website, where operational issues have delayed flights and driven some customers away, leading to a drop in sales; the website will be redesigned, which they hope will recapture the lost sales and boost revenue.

Since March 2012 UAL has suffered at least four technical disruptions after switching its reservation booking system. At one point this year a technical glitch led their website to sell tickets for $0 for several hours before the problem was rectified.

By. Joao Peixe of Oilprice.com



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