UAL turns operating profit

NEW YORK (Reuters) - United Airlines parent UAL Corp UAUA.O reported its first quarterly operating profit since 2007 on Tuesday, helped by increased passenger revenue, capacity control and lower-than-expected costs.

UAL's second-quarter profit surpassed Wall Street expectations, sending the company's shares up as much as 6.2 percent on the Nasdaq, while the S&P 500 waffled between gains and losses.

"We feel pretty good right now about our trajectory for the second half of the year," Chief Financial Officer Kathryn Mikells said during a call with analysts. "This quarter's results were driven by our strong revenue recovery."

United executives said July and August bookings appeared to be strong, but they added that it was difficult to predict fourth-quarter trends at this time.

Airlines are starting to recover after two years of volatile fuel prices and decreased travel demand. Capacity cuts have allowed carriers to trim costs and lift fares.

"Capacity discipline has been a cornerstone of our significantly improved financial results," Mikells said.

Excluding items, earnings from operations were $430 million, or $1.95 per share in the second quarter, compared with a loss of $321 million, or $2.21 per share, a year ago.

Analysts, on average, had expected the company to post earnings of $1.78 per share, according to Thomson Reuters I/B/E/S.

The Arca Airline Index .XAL rose 1.8 percent, while the S&P 500 was up 1.14 percent. UAL's shares closed up 4.82 percent at $22.20 on the Nasdaq.

Continental Airlines CAL.N, US Airways Group (LCC.N), and AMR Corp's AMR.N American Airlines are due to post results later this week.

CURBING CAPACITY GROWTH

On Monday, Delta Air Lines (DAL.N) reported a third-quarter outlook that disappointed investors and drove its share price down, despite posting its highest quarterly profit in a decade.

UAL is merging with Continental, creating an airline that will surpass Delta as the world's largest carrier. Analysts expect the combined company to sop up some excess capacity in the industry by eliminating duplicate routes. The merger, which still must be approved by regulators, is expected to close before the end of 2010.

UAL is expected to cut capacity on its flights by as much as 2.4 percent this year.

"People were a little bit reassured that a major airline like United, which will soon be the world's largest airline, will continue to be diligent about capacity constraints," Stifel Nicolaus analyst Hunter Keay said.

Operating revenue rose 28.4 percent to $5.16 billion in the second quarter. Mainline unit revenue, the revenue from seats on United-operated flights, rose more than 28 percent.

Excluding fuel and expenses associated with UAL's planned merger with Continental, costs rose 1.9 percent. According to a note to investors, JP Morgan analyst Jamie Baker said he expected a 3.4 percent rise in this metric for the second quarter.

Net income was $273 million, or $1.29 per share, compared with $28 million, or 19 cents per share, a year earlier.

AGREEMENT WITH PILOTS

Separately on Tuesday, United and Continental said they had reached an agreement in principle with their pilot unions on a framework for operations of the two groups.

Talks between management and the pilots started more than a month ago, but broke down in June. Talks resumed last week and finished on Monday in a hotel in Denver, Colorado, said Brian Bagenski, spokesman for Continental's pilots union.

The latest development is a "gateway to negotiating a joint collective bargaining agreement," Bagenski said. The agreement paves the way for the groups to integrate their seniority lists.

"The negotiations are very complex and with complexity comes the potential for a long timeline," he said, adding the talks could still collapse.

(Additional reporting by Karen Jacobs in Atlanta; Editing by Derek Caney and Maureen Bavdek)