United Airlines Holdings Inc. (UAL, Financial) has established itself as a leading player in the airline sector with a range of additional services, including loyalty programs, credit cards, airport lounges and travel insurance.
The company has strongly rebounded from the pandemic downturn with record revenue in recent quarters. Despite its strong financial performance and optimistic outlook, United Airlines' stock still trades below pre-2020 values. This presents a compelling opportunity for investors.
Positive outlook amid industry recovery
United Airlines recorded a strong first-quarter performance despite struggling with increased fuel and labor costs due to inflation, as well as the cancellation of flights. Although the number of passengers was still below pre-pandemic levels, international arrivals surged to 80% of pre-pandemic levels in the first quarter of 2023, according to UNWTO World Tourism. During this period, approximately 235 million tourists traveled internationally, more than double the figures recorded in the same period of 2022. These numbers reflect a significant recovery, with two-thirds of pre-pandemic tourist volumes restored last year. Additionally, as per IATA data, U.S. airlines’ domestic demand climbed 5.5% in April and was 3.3% above 2019 levels.
Not every airline company will benefit from these positive market dynamics. To understand whether United Airlines is a big winner in improving macroeconomic conditions for the airline industry, investors need to evaluate a few financial performance metrics.
United Airlines’ total operating revenue increased by an impressive 51.1% year-over-year in the first quarter with total revenue per available seat mile increasing 22.5% year over year, indicating effective revenue management strategies and improved pricing power. These recent results suggest the company is making the most of the strong demand for air travel in the post-pandemic era.
In April, the company announced the largest South Pacific network expansion ever, introducing new non-stop flights and increasing its capacity to and from the continental U.S. This strategic move positions the company to capture the growing demand for travel between the U.S. and Australia and New Zealand, presenting significant revenue opportunities in the coming years. United Airlines also unveiled the United Airlines Ventures Sustainable Flight FundSM, a unique investment vehicle aimed at supporting startups focused on decarbonizing air travel.
As the industry sets its sights on the upcoming summer season, United Airlines is preparing for a busy period of operations. Surprisingly, travel demand shows no sign of faltering despite concerns over peaking inflation. The International Air Transport Association’s passenger polling data from May further supports the optimistic outlook, with 41% of travelers expressing their intention to travel more in the next 12 months compared to the previous year. Additionally, 49% anticipate maintaining the same level of travel activity. With a robust schedule in place, United expects its capacity to reflect the heightened demand during the peak summer months. Notably, the company has increased its scheduled capacity by an impressive 39% in the Atlantic region, while the broader industry, excluding United, estimates a slight decrease of approximately 1%. Across the Pacific excluding China, United foresees a 14% increase in capacity, despite the industry facing a decline of around 7% compared to 2019 levels underlining United's expanding presence and connectivity in key international markets.
In terms of overall capacity, United Airlines expects international available seat miles to account for 46% of its total capacity this summer, a slight increase from the 43% recorded in 2019. This projection indicates the airline's strategic focus on international routes and its optimism regarding the recovery of global travel. With these proactive measures, the airline seems to be well-prepared to seize the opportunities presented by the anticipated surge in summer travel.
There is also an encouraging sign of recovery in corporate business travel. The company has observed a notable rebound in corporate business, particularly in global long-haul markets, where face-to-face meetings are replacing videoconferencing. While it is still early, the airline is optimistic about the trajectory of corporate demand, with May and June showing promising growth compared to previous months. This resurgence in business traffic is a positive indicator of the recovery of the corporate travel segment. The recent banking crisis temporarily impacted demand across various customer types - its effects were more pronounced in domestic business travel - while domestic leisure and overall international demand were relatively less affected. In the weeks following the crisis, there was an eight-point decline in business demand compared to the same period in 2019. However, this trend has since reversed, indicating a gradual restoration of confidence among corporate travelers.
Looking ahead to the second quarter, United Airlines expects significant growth in total revenue, with a projected increase of 14% to 16% compared to the same quarter in 2022. The airline's outlook remains strong, with expected growth rates of around 8% to 10% for domestic revenue and nearly 30% for international revenue. These positive projections align with the current booking trends, which show a 13% increase in booked deals and 31% growth compared to 2019.
IATA has also updated its 2023 profit forecast for the aviation industry. With strong travel demand and a favorable decline in oil prices, the industry's profit forecast has been raised to $9.8 billion, up from the previous estimate of $4.7 billion. One encouraging sign is the expected growth in revenue to $803 billion. This represents a 9.7% increase compared to the previous year, pushing the industry closer to its pre-pandemic level of $838 billion in 2019. Passenger revenues are projected to contribute significantly to this growth, with an estimated $546 billion this year, reflecting a 27% growth from 2022. Efficiency levels within the industry are commendable, with an expected average passenger load factor of 80.9%. This nears the record performance achieved in 2019, with an 82.6% load factor. The high demand for travel across many markets contributes to robust yields, which are expected to experience a marginal decline of 1.1% compared to the previous year.
The pressure from oil prices has eased this year, providing some relief to the industry. Fuel costs, a major expenditure for airlines, are expected to average $98.5 per barrel, resulting in a total fuel bill of $215 billion. Although cheaper than initially expected, fuel costs will still account for 28% of the average cost structure, above the pre-pandemic level of 24% in 2019.
Although revenue growth is promising, airlines still face challenges in maintaining profitability. However, with strong demand and operational efficiency, margins are anticipated to recover in the near future. Consequently, industry leaders, including United Airlines, are expected to regain their momentum. Analysts are already upgrading their price targets in response to this positive outlook. Despite the uncertainties and risks associated with the airline industry, United's financial results, network expansions and operational achievements showcase its ability to navigate the evolving landscape successfully. The company's strong liquidity position, with approximately $19 billion in liquidity at the end of the first quarter, provides a solid foundation for future growth and investment opportunities.
Takeaway
United Airlines has emerged as a formidable industry leader, successfully rebounding from the challenges posed by the pandemic. With near-record revenue numbers and a stock price that remains below its pre-pandemic levels, the stock seems attractively priced today. The aviation industry's outlook for 2023 appears positive and the anticipation of improved margins and clearer macroeconomic conditions further strengthens the case for investing in industry leaders.
By closely monitoring the capital-intensive industry dynamics and macroeconomic conditions, investors can capitalize on the undervalued potential of United Airlines.
