More Turbulence Ahead for United Airlines

On Jan. 23, no-moat

United’s quarter featured positive year-over-year yield evolution across all regions, noting domestic was basically flat. The synchronized increase is encouraging, but unit revenue continues to underperform peers. Total revenue stood at $9.4 billion, increasing 4.3% year over year. United, which was guiding to pretax margins of 6%-7% this quarter, landed at 6.4%. EPS came in at $1.99. Operating cashflows grew by $70 million year over year to $728 million. For full-year 2017, total revenue grew 3.2% driven higher by mainline passenger revenue growth of 4.5%. Unadjusted 2017 pretax margins contracted about 250 basis points to 7.9% due to higher fuel and labor costs coupled with weak unit revenues. EPS came in at $7.02 (adjusted $6.76).

Management highlighted EPS as the key metric instead of margins. We note that pretax margins contracted in 2017, and we forecast a slight contraction again in 2018 (management says margins will be flat). United puts 2018 EPS at $6.50-$8.50 (we were at $7.57) with a 2020 EPS target of $11-$13; this guidance includes tax reform and the fuel forward curve. EPS isn’t the metric we’re focused on, since United won’t pay cash taxes until 2020-21. Based on our projections, we estimate that $11 EPS implies roughly 10% pretax margins, which compares with peak margins of 13.6% in 2015 and lies 300 basis points below where we think Delta will land in 2020.

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