United Airlines Posts Decent Q2 Earnings, but Capacity Remains Constrained by Labor Shortages

No-moat-rated United Airlines (UAL) posted a decent second quarter as demand for air travel surged, but provided a disappointing capacity outlook. Revenue of $12.1 billion and earnings per share of $1.43 missed FactSet consensus estimates by 0.1% and 22.9%, respectively. We are maintaining our $57 per share fair value estimate as we decrease our medium-term capacity outlook and increase our passenger yield and load-factor estimates.

Passenger revenue came in 3.2% higher than 2019 levels on capacity that was 14.5% lower than 2019 levels, load factors that were 70 basis points higher than 2019 levels, and yields that were 19.8% higher than 2019 levels. We are reducing our near- and medium-term capacity outlook to reflect continued labor shortages, but we still think capacity can return to 2019 levels in 2024. Management’s strategy of holding more wide-body aircraft to capitalize on international travel recovery has been negatively affected by the Russo-Ukrainian war as many transpacific routes cross Russian airspace, which is currently closed to Western airlines. United’s network is more exposed to transpacific routes than peers, so we expect United to be the most affected U.S airline. Yields increased primarily due to higher oil prices. We’re anticipating yield declines in 2023 and 2024 as we decrease our assumed fuel prices to midcycle levels.

Unit costs excluding fuel costs and special items came in at 11.62 cents per seat mile, 17.0% higher than 2019 levels. Much of the higher unit costs reflect excess capacity costs, and we’re assuming unit costs will continue to decrease with increased capacity. United is more highly exposed to excess capacity costs than peer airlines as it is the most internationally exposed major airline in the U.S.