Skip to Content
Stock Analyst Update

More Turbulence Ahead for United Airlines

The airline has a lot of work to do to right its operations, and fixes will likely involve near-term pain.

Mentioned:

On Jan. 23, no-moat  United Airlines (UAL) reported fourth-quarter and full-year 2017 results. While we like the hub optimization strategy laid out following the results release, we think United still has a long row to hoe to right its operations and these fixes will likely entail near-term pain. After results beat expectations shares rose, but the subsequent discussion revealed aggressive capacity expansion coupled with flat year-over-year operating margins in 2018. This spooked investors, and shares began falling after-hours. We’re not planning to adjust our $80 fair value estimate.

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. 

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Chris Higgins does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.