United Airlines Tethered to International Recovery

No-moat-rated United Airlines UAL posted a solid fourth quarter that met the firm’s pre-omicron variant guidance, which we see as impressive, and the firm brought down full-year 2022 guidance to levels that we think are more achievable. Revenue of $8.2 billion and adjusted loss per share of $1.60 beat consensus expectations by 2.9% and 23.5%, respectively. After rolling our model into 2022, we are increasing our fair value estimate to $57 per share from $55 to reflect Morningstar’s updated assumption that corporate tax increases will not occur.

Passenger revenue was roughly 30.8% lower than 2019 levels, reflecting 22.8% lower capacity, 5.5 points of lower load factor, which was almost entirely driven by lower load factors on international flights, and 3.8% lower yields than 2019. Yields increased by less than 1% from the prior quarter, but fuel prices per barrel increased 12.6%. These price increases are lower than U.S. network peers. We see this as a near-term point of concern, but since we see most air travel as a commoditized service, we expect that the firm should pass through increased fuel costs onto the consumer in the medium term. The firm remains committed to capitalizing on a potential international recovery this year and plans to focus on transatlantic travel due to lower COVID-19 restrictions. Pre-pandemic, transpacific routes accounted for about 11.9% of passenger revenue and we suspect a considerable proportion of this was from China. We think it will be difficult for the firm to recover its international business fully until China relaxes its stringent COVID-19 restrictions.

Adjusted operating margins contracted 350 basis points to negative 4.3%, which is roughly middling among U.S. network carriers this quarter. We think the firm can significantly improve margins with increased utilization of widebody assets this summer as international leisure travel returns due to lower COVID-19 restrictions.

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