United Has Long Path to Recovery From COVID-19 Pandemic
We maintain United's no-moat rating and fair value estimate despite second quarter performance.
No-moat-rated United Airlines (UAL) reported a difficult second quarter as the coronavirus pandemic ravaged commercial airline passenger traffic. We are maintaining our $40.50 fair value estimate for the firm, and we think the worst days for U.S.-based airlines have already passed as the U.S. Transportation Security Administration throughput has remained at roughly 26.5% of 2019 levels in July (versus 6% of 2019 in April) despite increasing virus cases. We expect that a robust recovery will not occur until a vaccine is widely distributed, which Morningstar expects by mid-2021. United is in a structurally difficult competitive position relative to peers due to its high exposure to international travel, but we give credit to management for rightsizing supply early on into the crisis.
Quarterly revenue declined by about 87%, which is largely reflective of the rapid decline in passenger traffic due to the pandemic. We were encouraged to see that other operating revenue, which includes loyalty revenue from co-branded card spending, outperformed the portfolio and decreased by 37% and that the premier members that drive much of the program are increasingly utilizing frequent flyer miles for leisure travel. This suggests to us that the most valuable members of the program continue to stay engaged with the program and would be less likely to switch to a cash-back card. The frequent flyer program is highly margin-accretive and accounts for a considerable portion of our valuation, so we will be closely watching frequent flyer engagement.
We think the firm also did a good job of cutting expenses. Excluding fuel and the CARES Act grant, the firm cut roughly 41% of operating expenses this quarter. While this is partially due to lower capacity, we think management deserves credit for cutting costs decisively. Management is targeting break-even at 50% of 2019 demand, which we think will require more cost-cutting, particularly within compensation expense.
|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.|
Burkett Huey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.