United Continental posts better-than-expected earnings amid passenger scandal

United Continental, the target of widespread global criticism over its forcible removal of a passenger last week, beat market estimates to report earnings per share excluding special items of $0.41 per share for the first quarter of this year, well above the market consensus of $0.38.

The carrier reported first-quarter net income of $129m, excluding special items, down from the year earlier period’s $435m.

United chief executive Oscar Munoz said in a statement that the incident which caused so much social media controversy — the brutal dragging of passenger David Dao off a flight on April 10, leaving him with a concussion, broken nose and two teeth knocked out – “will prove to be a watershed moment for our company”.

He said in the first quarter of 2017 “our financial and operational performance gives us a lot of confidence about the foundation we are building”, but he added “it is obvious from recent experiences that we need to do a much better job serving our customers”.

“The incident that took place aboard Flight 3411 has been a humbling experience, and I take full responsibility.”

United will hold an investor call on Tuesday morning, during which Mr Munoz, widely criticized for his tardiness in apologising for the incident, is expected to face tough questions about how it could impact the carrier’s results.

By today’s close, before the release of first-quarter earnings, United shares had regained nearly all their losses from last week to close at $70.77, almost unchanged from the level before videos of the dragging incident went viral last Monday. It shares were up 1.3 per cent in after-hours trading.

Widespread condemnation of the dragging incident, including from politicians and consumer groups, appeared not to affect investor valuation of the stock.

Most airline industry analysts said they did not believe the consumer backlash over the event would have any substantial effect on United’s profits. “This fiasco where a man was dragged off a UAL plane is a classic media-driven overreaction, in our view. While truly a bad situation that (1) shouldn’t have happened and (2) UAL handled badly afterwards, we expect it will blow over,” Hunter Keay of Wolfe Research wrote in a note earlier today.

Helane Becker of Cowen and Company raised her target price for United shares to $75 from $72 but pointed out that any threat of government action on how airlines treat passengers when planes are overbooked or oversold “should be a concern for investors, as any changes could have financial implications”.

“We expect United’s comments tomorrow will be highly scrutinised,” she added.

Investors appeared to be paying more attention to United’s announcement last week of better-than-expected passenger revenue per available seat mile – a key industry metric – and lower fuel prices for the first quarter.

“My expectation is that this event will be more significant than investors thought initially. Equity investors tend not to be good predictors of the magnitude of these reputational risks,” says Nir Kossovsky, CEO of Steel City Re. Even when reputational events are severe, he says, the price of a stock generally doesn’t drop more than 5 percent initially, but after 20 weeks the price drop on average is nearly 25 percent.

Jim Corridore of CFRA reiterated his strong buy opinion on United shares, writing in a note after the results were released that “revenues were better than we expected, and unit revenue trends are likely to improve in the second quarter. Fuel and labor costs were sharply higher, but were in line with our expectations. United said the right things regarding its need to upgrade its customer service and should be able to move past its PR nightmare, in our view.”

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