United Airlines Holdings Inc. (UAL, Financial) delivered good results for the first quarter of 2022, surpassing Wall Street's expectations in terms of both revenue and earnings. Management announced it is expecting the highest quarterly revenue in the second quarter, which makes many of us wonder if the airline major’s business truly made such an amazing recovery after the Covid-19 impact. Let us take a closer look to evaluate the recent developments surrounding the company.
International travel
While domestic travel may be the biggest driver of growth today for most U.S. airlines, United has a particularly large exposure to international travel. It is the most internationally-focused U.S.-based carrier with nearly 40% of revenue coming from international operations in 2019.
This is a major challenge for the company as international travel is still relatively slower in recovering given the border controls resulting from the pandemic as well as the Russia-Ukraine situation. This regulatory uncertainty associated with foreign travel might slow United Airlines’ recovery in comparison to its peer group. Business travel is a key growth driver for its frequent-flier program and is a high-margin revenue stream for the company. As a result, the management team had been largely focused on cost-cutting and margin expansion prior to the pandemic and might go back to the same objectives from 2023 onward.
Recovery story
Vacations are currently at the top of the list of reasons to fly, with leisure travel sparking a resurgence in demand that is quickly returning to levels seen in 2019. The American domestic travelers' insatiable desire to escape is unaffected by inflationary pressures. This is helping United Airlines' financial performance, which was badly hit by the pandemic and has been in recovery mode ever since.
Its stock price crashed to around $28 and has more than tripled since then. The travel environment is finally returning to near-normal levels this year. Even in the earnings calls, management is no longer emphasizing comparisons to pandemic-affected periods and they also expect to be profitable in 2022 with a double-digit operating margin. United Airlines expects the travel boom to continue at least within the U.S. and there appear to be no near-term factors stating otherwise, so it is definitely positive news for investors.
Airline macro
The airline industry has been known to have a bad history of value destruction, but the fact remains that many U.S. airlines have structurally improved their business model. One of the biggest reasons for the value destruction was price wars between the low-cost and ultra-low-cost carriers to attract customers with lower fares, driving down the profitability of the industry as a whole. The outbreak of the Covid-19 worsened the situation with lockdowns, travel bans and other restrictions. Airlines have been in recovery mode ever since, tackling the situation by cutting costs and relocating planes to low-parking regions.
The Russia-Ukraine crisis and the jump in oil prices came at a bad time as well, raising fuel costs for airlines. However, with the impact of the pandemic slowly receding, the travel recovery has been strong. As per StrategyR research data, the global airline market was valued at $332.6 billion in 2020 and is expected to expand to $744 billion by 2026, with a compounded annual growth rate of 12.7%. Thus, there is expected to be some optimism for shareholders of airline companies from a macroeconomic standpoint.
Final thoughts
As we can see in the above chart, United Airlines has been moving sideways for the past year. Prior to the pandemic, the stock was trading consistently above the $80 mark, but it is below $50 today given the recovery is still in progress.
The company is trading at an enterprise value-to-revenue multiple of 1.22 and a price-to-operating cash flow multiple of 5.04, both of which are well below its airline peers. Even the GF Value Line suggests it is modestly undervalued currently.
While the slow recovery of international travel and the big jump in oil prices are key reasons for the sideways movement of the stock, United Airlines could be worth holding onto.
