United Poised to Benefit From Lower Travel Restrictions

No-moat United Airlines UAL posted strong revenue growth in the first quarter and provided a bullish outlook for industrywide pricing power, which has evaded airlines for nearly the entire history of the industry. Revenue of $7.6 billion and loss per share of $4.24 missed FactSet consensus estimates by 1.3% and 0.6%, respectively. We are maintaining our $57 per share fair value estimate for United as increased yield and capacity assumptions offset the effect of increased oil prices in our model. Passenger revenue decreased 7.7% sequentially (to 72.8% of 2019 levels) as capacity sequentially decreased by 2.8% (to 81.1% of 2019 levels), load factors decreased by 440 basis points sequentially and yields increased by 0.8% sequentially. The sequential declines were primarily due to the surge in COVID-19 cases during January and February. That noted, management highlighted that demand trends have improved significantly, particularly for international travel. United is the airline that is the most exposed to international travel. Management highlighted that it expects a pilot shortage resulting from normalizing demand and a smaller workforce, which are a result of pandemic-related retirements. Management expects the shortage to result in considerably higher yields over the next cycle relative to the previous cycle. While we think this view may hold some water and pilot availability should be an investor watch item, we think that airlines would likely need to increase wages considerably to retain a workforce in this scenario, which ought to limit shareholder gains from the supply-demand mismatch. Further, we would expect that United and its competitors could train new pilots over the course of a few years, which should reduce the impact of the pilot shortage in a normalized setting. Unit costs excluding fuel costs increased 5% sequentially, more than the decrease in available seat miles. We think this is somewhat indicative of inflation hitting the firm's cost base.

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