United Airlines: Invest Now?

United Airlines Holdings, Inc. (UAL) has been thriving as consumers unleash pent-up travel demand. The company is benefiting from a steady recovery in domestic and leisure air-travel demand. The stock has had an impressive run on the bourse so far this year, outperforming the growth of the industry it belongs to. United Airlines currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The Zacks Consensus Estimate for United Airlines’ first-quarter 2023 earnings has moved up 90.57% year over year. For 2023, the company expects year-over-year earnings growth of more than 100%. United Airlines has seen sales grow over the past seven quarters. The Chicago-based air carrier generated a record $3 billion in operating cash flow during the quarter and saw the lowest seat cancellation rate for the first quarter since 2012.

United Airlines stock has a Relative Strength Rating of 93 and its EPS rating is 72. The stock has advanced 48% so far this year, hitting a two-year high and ascending past a cup-with-handle base buy point of 54.05.

Considering the 90-day investment horizon and your way above-average risk tolerance, our recommendation regarding United Airlines Holdings is 'Strong Hold'. The recommendation algorithm takes into account all of United Airlines' available fundamental, technical, and predictive indicators.

United Airlines' latest earnings results

United Airlines has been performing well financially, with its latest earnings report (Q4 and full-year 2023) exceeding revenue and EPS expectations. Here is a summary of their latest earnings results:

Fourth-Quarter Financial Results:

• Capacity up 14.7% compared to the fourth quarter of 2022.
• Total operating revenue of $13.6 billion, a 9.9% increase compared to the same period in 2022.
• TRASM down 4.2% compared to the fourth quarter of 2022.
• CASM down 0.1%, and CASM-ex up 4.9%, compared to the fourth quarter of 2022.
• Pre-tax income of $0.8 billion, with a pre-tax margin of 5.7%.
• Adjusted pre-tax income of $0.8 billion, with an adjusted pre-tax margin of 6.2%.
• Net income of $0.6 billion.
• Adjusted net income of $0.7 billion.
• Diluted earnings per share of $1.81.
• Adjusted diluted earnings per share of $2.00.

Full-Year Financial Results:

• Net income of $2.6 billion.
• Adjusted net income of $3.3 billion.
• Pre-tax income of $3.4 billion, with a pre-tax margin of 6.3%.
• Adjusted pre-tax income of $4.3 billion, with an adjusted pre-tax margin of 8.0%.
• Diluted earnings per share of $7.89.
• Adjusted diluted earnings per share of $10.05.
• Ending available liquidity of $16.1 billion.
• Total debt and finance lease obligations of $29.3 billion at year-end.
• Adjusted net debt to adjusted EBITDAR of 2.9x.

United Airlines' financial performance has been strong, with improvements in revenue, net income, and earnings per share. The company has also made significant investments, such as ordering new aircraft and improving its hubs and clubs. Additionally, they have focused on sustainability and social impact through initiatives like the Eco-Skies Alliance program and the United Aviate Academy.

The stock's value for long-term investors

United Airlines (UAL) has been one of the airline industry's top performers in the past year, with its share price increasing by 5.1% over the past three months, outperforming the industry's growth of 4.4%. The company's latest earnings results indicate that it is thriving as consumers unleash pent-up travel demand.

Positive Factors Influencing UAL's Stock Value

• Strong financial performance: United Airlines reported a net income of $600 million for the final quarter of 2023, with a year-over-year increase in total operating revenue of 9.9%, reaching $13.6 billion. This beat Wall Street's forecast of $13.54 billion in revenue.
• Impressive earnings surprise history: United Airlines has consistently delivered earnings surprises, with an average surprise of 7.77% in the last four quarters.
• Recovery in air-travel demand: The company is witnessing a steady recovery in domestic and leisure air-travel demand, which has contributed to its profitability in the third quarter of 2022. This was the second consecutive profitable quarter for UAL since the onset of the pandemic.
• Positive estimate revisions: The Zacks Consensus Estimate for United Airlines' first-quarter 2023 earnings has increased by 90.57% year over year over the past 60 days. For 2023, the company expects year-over-year earnings growth of more than 100%.
• Fleet modernisation: In December 2022, United Airlines placed a significant order for 100 Boeing 787 Dreamliners, with options to purchase 100 more. This move to modernise its fleet is expected to enhance operational efficiency.
• Strong Zacks Rank and VGM Score: United Airlines currently holds a Zacks Rank #1 (Strong Buy) and a VGM Score of A. This indicates that the stock is an attractive investment proposition, as stocks with a VGM Score of A or B, combined with a Zacks Rank of #1 or #2, offer the best investment opportunities.

Potential Concerns for Long-Term Investors

• Vulnerability to economic downturns: Airlines are highly cyclical businesses, and people tend to cut air travel during recessions. Therefore, a potential economic downturn could negatively impact United Airlines' performance.
• Competition from budget airlines: Legacy carriers like United face intense price competition from budget airlines, which can affect their profitability.
• Capital-intensive nature of the business: Running an airline is expensive due to the high costs of aircraft, leasing, staffing, maintenance, and fuel. This can impact the company's financial performance, especially if fuel prices surge.
• Safety incidents: United Airlines has experienced recent safety incidents involving its planes, which have led to investigations and updates to safety training and procedures. Such incidents can impact the company's reputation and may cause travellers to choose other carriers.
• Dependence on international travel: United Airlines has been rapidly adding international destinations, which can be profitable but also carries risks. International travel is more volatile, and people may reduce major trips abroad during financial concerns or geopolitical uncertainty.

The company's recovery from the Covid pandemic

The recovery of United Airlines from the Covid pandemic has been a steady one, with the company reporting a smaller quarterly loss in Q3 of 2021 than the previous year. The airline was also profitable in the third and fourth quarters of 2022, marking the second consecutive profitable quarter since the pandemic began.

United Airlines has seen a steady recovery in domestic and leisure air-travel demand, with the third quarter of 2022 being profitable for the company. The airline expected to be profitable in the third and fourth quarters of 2021, buoyed by a strong summer travel season. However, the fast-spreading Delta variant of the coronavirus impacted travel, leading to lowered estimates.

United Airlines' management expects to see strong air-travel demand and positive pricing trends. In December 2022, the company placed the largest 787 Dreamliner order with Boeing to modernise its fleet. The airline anticipates receiving the new widebody planes between 2024 and 2032, with plans to expand its transatlantic service in the coming year.

The company's recovery from the pandemic was further evidenced by its share price, which rose about 2% to $47.22 in extended trading following the Q3 2021 results. As of July 12, 2024, United Airlines was thriving as consumers unleashed pent-up travel demand.

The airline's modernisation of its fleet

United Airlines has placed a historic order for new aircraft as part of its fleet modernisation. In December 2022, the airline placed an order for 100 Boeing 787 Dreamliners, with options to purchase 100 more. This is the largest-ever order of widebody jets by a US carrier. The airline also ordered 270 aircraft in June 2021, including 150 737 MAX 10 aircraft, 50 737 MAX 8 aircraft, and 70 A321neo aircraft.

The new aircraft will modernise and re-energise United's widebody fleet, with the first deliveries expected in 2024. The airline plans to replace older planes, such as the Boeing 767 and 777 jets, with the new Dreamliners. The new planes will offer an enhanced in-flight experience for passengers, with features such as spacious interiors, larger windows, LED mood lighting, and higher humidity settings to reduce jet lag.

The 787 Dreamliners are also more fuel-efficient, reducing carbon emissions by up to 25% compared to the older planes. This move aligns with United's ambitious goal to achieve a 100% reduction in greenhouse gas emissions by 2050 without relying on carbon offsets.

In addition to the new aircraft orders, United is also retrofitting its existing aircraft with modern amenities. The airline is adding new Polaris business-class seats, as well as refurbishing the interiors with in-flight entertainment screens, Bluetooth connectivity, and larger overhead bins.

United's significant investments in modernising its fleet demonstrate its commitment to enhancing the travel experience for its passengers and reducing its environmental impact. These upgrades position the airline to capture increasing travel demand and strengthen its competitive advantage in the market.

The volatility of the travel industry

The travel industry is vulnerable to volatile shifts in demand, which can be caused by a variety of factors, including terrorism, war, political crisis, and natural disasters. The COVID-19 pandemic is a prime example of an event that can severely disrupt travel patterns, particularly for business travellers.

Business travel is a critical component of the travel industry, accounting for over $1.4 trillion in spending in 2018, or 21.4% of the global travel and hospitality sector. It is also more volatile and slower to recover than leisure travel after economic downturns and other disruptions. For example, during the 2008-2009 global recession, international business travel from the United States declined by 13% while international leisure travel only declined by 7%.

The COVID-19 pandemic has had an even more significant impact on business travel, with US airline capacity declining by about 70% in April 2020 compared to 2019. The recovery of business travel is expected to be a long and phased process, with regional and domestic trips, as well as sales and client-related meetings, likely to return first. International travel and travel for internal meetings and major industry events will take longer to rebound due to the complexity of government regulations and the high risk of fast-changing policies.

To navigate this volatile environment, travel industry players must develop a deep understanding of when different segments will return and pivot their operations and policies to accommodate new customer needs and health and safety measures.

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