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United buying planes, planning 'entry-level' fares

United Airlines' fourth-quarter profit spiked on cheaper jet fuel but still fell short of Wall Street expectations. | Getty

United Airlines’ fourth-quarter profit spiked on cheaper jet fuel but still fell short of Wall Street expectations.

United is in the middle of a turnaround effort that has included a shake-up of its top ranks. It’s shown improvement in some areas like on-time performance, but revenue is shrinking at both the main airline and the United Express division.

With jet fuel prices tumbling, airlines are making more money even while charging lower average fares.

The airlines are raising pay for employees and buying new planes. United announced Thursday that it will buy 40 new Boeing 737-700 jets that will enter the fleet starting in mid-2017. Those planes will replace smaller planes used by regional airlines that operate United Express flights.

United also announced that later this year it will begin selling new “entry-level” fares for the most cost-conscious passengers. Delta has a “basic economy” ticket that doesn’t allow changes or let passengers pick their seat. American has said it will introduce a no-frills fare this year.

The big airlines are trying to compete with discount carriers such as Spirit Airlines for the large number of passengers who shop mostly by price.

United Continental Holdings Inc. on Thursday reported earnings of $823 million in the fourth quarter, up from $28 million a year ago.

Excluding one-time items, the company earned $2.54 per share, a nickel short of expectations by industry analysts according to polls by both Zacks Investment Research and FactSet.

Revenue fell 3 percent to $9.04 billion, slightly below the $9.08 billion average forecast from the FactSet analysts. The decline was caused by lower average fares — both United and Southwest reported that passengers paid 7 percent less per mile than in late 2014.

Revenue fell 3 percent on so-called mainline United flights, 9 percent on United Express, and 11 percent for cargo. Only “other” revenue — things like bag fees, ticketing fees, and money from the MileagePlus loyalty program — grew; up 11 percent.

Like other airlines, United was helped greatly by plunging oil prices, which helped cut its fourth-quarter fuel bill by 36 percent, a savings of $912 million from the year before.

Labor costs rose nearly 8 percent and eclipsed fuel as the top expense. That too is a pattern being seen at other airlines.

United has struggled since its 2010 merger with Continental Airlines, a deal that briefly made it the world’s biggest airline — it has since slipped behind American and Delta in passenger traffic. The airline has been plagued by technology outages and flight delays.

In September, CEO Jeff Smisek left as a result of company and government investigations into dealings with the agency that operates the airport in Newark, New Jersey, a United hub. His replacement, Oscar Munoz, suffered a heart attack after six weeks on the job and had a heart transplant two weeks ago. The company says he will be back this spring; general counsel Brett Hart is acting CEO.

Under Munoz and now Hart, the company has been reviewing its operations from the boarding process to the coffee served in flight. There have been signs of progress — United rose to fourth among U.S. airlines in on-time performance in the latest government figures.

In a statement from the airline, Hart said that in the fourth quarter, United “improved our operational performance, continued to invest in our products and services and achieved record financial performance. We have great momentum as we head into 2016.”

BY DAVID KOENIG, AP Airlines Writer