United Airlines Earnings: Cost Growth Portends Industry Drama as CEO Predicts a Shakeout

Key Morningstar Metrics for United Airlines Holdings

• Fair Value Estimate: $35.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of United Airlines Holdings’ Earnings

United Airlines Holdings UAL reported third-quarter capacity and revenue right in line with our expectations, but growth in the airline’s unit costs again outstripped our expectations. We maintain our $35 fair value estimate for the stock. We see a scenario emerging that may favor full-service airlines like United, which can defray their costs across multiple segments of travelers. By contrast, no-frills airlines are experiencing similar cost growth, but have had nowhere to hide from sudden fuel price spikes this summer and leveling domestic demand.

Our thesis is that the airline industry will return to historical competitive dynamics and will not generate economic profit over a cycle. This scenario does not preclude one or more airlines from achieving profitability while others lose money, or worse. During the company’s third-quarter earnings call, CEO Scott Kirby said, “We also expect ... the domestic market is going to see a shakeout that leads to an improvement in [United’s] margins over the medium to long term. It’s impossible to call the timing exactly. But I guess that we’ll see meaningful industry changes about 2H ‘24.” The scenario he describes entails one or more low-cost airlines failing as industrywide cost growth brings their unit costs closer to those of the full-service airlines.

Kirby describes United as well-positioned to eventually benefit from this scenario. The airline will take delivery of hundreds of planes in the coming years that will offer not just more premium seats, but also many more regular seats to pick off customers from distressed low-cost airlines. We believe it is a mostly plausible scenario, though we expect it will weigh on the company’s margins. We therefore forecast United’s earnings to reflect some market share gains, but at yields and margins closer to historical averages.