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Investment Overview for United Continental Holdings (NYSE:UAL)
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Below are key drivers of UAL that present opportunities for upside or downside to the current Trefis price estimate.
United US
- United's US Passenger Yield: United's US passenger yield has increased from $0.11 in 2009 to $0.14 in 2012. We expect it to increase to $0.17 by the end of the Trefis forecast period. As fuel prices increase the carriers' passenger fares shall rise as well. This shall lead to to an increase in passenger yield. If however, the rise in fuel prices leads to a more than anticipated rise in passenger fares so that yield reaches $0.19 by the end of the Trefis forecast period, then there could be a potential upside of approximately 5% to the ${trefisprice}.
On the other hand, if due to competitive pressure, United is not able to increase fares as much and US passenger yield rises to only $0.16 by the end of the Trefis forecast period, then there could be a potential downside of approximately 4% to the ${trefisprice}.
United International
- United's International Passenger Yield: United's international passenger yield increased from $0.11 in 2009 to $0.15 in 2012 as a result of the airlines passing high fuel prices to passengers. We expect this figure to increase to $0.17 by the end of the Trefis forecast period. If however, this rises to only $0.16 then there could be a potential downside of approximately 5% to the ${trefisprice}. On the other hand, if it increases to $0.19 by the end of the Trefis forecast period then there could be a potential upside of approximately 5% to the ${trefisprice}.
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United Continental Holdings (NYSE:UAL) (together with its consolidated subsidiaries,"UAL" ) is an airline holding company, incorporated in Delaware with headquarters in Chicago, Illinois. Its principal, wholly-owned subsidiaries are United Air Lines, Inc. (together with its consolidated subsidiaries, "United") and, effective October 1, 2010, is Continental Airlines, Inc. (together with its consolidated subsidiaries, "Continental"). United Continental Holdings is the successor of UAL Corporation, which agreed to change its name to United Continental Holdings in May 2010, when a merger agreement was reached between UAL Corporation, Continental, and JT Merger Sub, a wholly-owned subsidiary of UAL corporation.
United and Continental transport people and cargo through their mainline operations, which utilize full-sized jet aircraft's, and regional operations, which utilize smaller aircraft that are operated under contract by United Express, Continental Express and Continental Connection carriers.
With key global air rights in the U.S., Pacific region, Europe, Middle East, Africa, and Latin America, UAL has one of the world's most comprehensive global route network. UAL, through United and Continental and their regional carriers, operates over 5,600 flights a day to more than 370 U.S. domestic and international destinations from the company's hubs at Newark Liberty International Airport (“Newark Liberty”), Chicago O’Hare International Airport (“Chicago O’Hare”), Denver International Airport (“Denver”), George Bush Intercontinental Airport (“Houston Bush”), Hopkins International Airport (“Cleveland Hopkins”), Los Angeles International Airport (“LAX”), A.B. Won Pat International Airport (“Guam”), San Francisco International Airport (“SFO”) and Washington Dulles International Airport (“Washington Dulles”). United and Continental are both members of Star Alliance, the world's largest airline network.
On March 1, 2012, FORTUNE magazine rated United Airlines the most admired airline on its annual airline-industry list of the World's Most Admired Companies. In addition, the magazine ranked United No. 1 for global competitiveness and long-term investment among 12 global carriers.
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The Fees and Cargo segment is the most valuable to the company because of following reasons.
Higher operating margin than core passenger travel business
UAL earned over 45% operating margins on its Fee and Cargo business in 2011 and only 12-13% margin on its core passenger operations. Marketing initiatives that contribute to an increase in Other Business revenue such as baggage handling, sale of mileage credits, Continental FareLock have zero or minimal direct costs associated with them. These programs offer additional revenue for the firm without any significant costs associated with them.
Significant revenue growth potential as a result of the synergies from the merger
UAL expects to generate significantly more revenue synergies in 2012, enabled by the conversion to a single passenger service system. A single passenger service system presents the opportunity to optimize the combined network and would enable United to harmonize the ancillary product portfolio of the two airlines and roll out new products.
Following the merger, the two airlines are also integrating their loyalty programs. In 2011, UAL announced that MileagePlus will be the loyalty program for the company beginning in 2012. Moving to a single loyalty program will be a significant milestone in the integration of the two airlines. Continental’s loyalty program formally ended in the first quarter of 2012. UAL continues to roll out new ways for customers to earn and redeem miles by expanding the number of business partners that participate in the MileagePlus loyalty network. In its Amadeus 2011 Yearbook of Ancillary Revenues, IdeaWorks estimates that United Continental generated approximately $3 billion in 2010, purely from miles sold through its third party card “partners.”
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Oil prices significantly impact UAL's bottom line
Fuel expenses represent one of the largest single costs faced by airliners and account for over 30% of the costs for airlines.
Based on projected fuel consumption in 2012, a one dollar change in the price of a barrel of crude oil would change UAL’s annual fuel expense by approximately $95 million. Information collected from Transtats indicate that fuel costs rose by approximately 29.7% for airlines over all in 2011 from the 2010 levels, and according to recent data compiled by IATA’s Jet Fuel Price monitor, there will be an increase of approximately $32 billion in the overall 2012 fuel bill for the airline sector.
Focus on keeping prices competitive in the airline industry prevents UAL from immediately passing on price increases to its customers, so UAL's expenses are heavily impacted by fuel prices and their volatility.
Weak macroeconomic conditions
The main challenge the global airline industry faces during 2012 and beyond is the state of the global economy. Europe’s sovereign debt crisis has created enormous uncertainty and is expected to impact the overall profitability of the sector. Tony Tyler, IATA’s director general believes that a failure on the part of governments to resolve Europe’s issues could lead to a loss of $8 billion in 2012 for the airline industry. As a result IATA has already downgraded its 2012 outlook for profitability to $3.5 billion from $4.9 billion that was expected a few months ago.
According to IATA’s latest forecasts; North America carriers are expected to earn about $1.7 billion; Asia Pacific carriers around $2.1 billion; African airlines are expected to lose $100 million and European airlines are projected to take a loss of $600 million due to economic uncertainty and higher passenger taxes.
Cautious capacity stance
Due to rising fuel expenses and weak economic conditions, several airlines have been forced to cut back on routes. Capacity cuts that have occurred in developed markets in 2011 are expected to persist in 2012. On the other hand growth in capacity has been robust in international markets. According to TranStats, the total available seat miles (ASM) have increased in international markets from approximately 524 million miles during the first ten months of 2010 to 560 million miles during the same period in 2011.
Legacy carriers including Delta Airline and United Continental curtailed capacity on domestic routes, while expanding modestly in international markets. Their overall system capacity remained almost flat. For 2012, the carriers are planning for flat to a slight decline in capacity. Delta will follow the strategy of reduced flying in markets that cannot generate adequate returns in a high fuel environment and is planning for 2012 capacity to be down 2% to 3% y-o-y. United Continental expects full year 2012 consolidated capacity to be essentially flat versus 2011.
Growth in ancillary revenues
With profitability declining for the overall airline sector, many of the carriers are figuring out ways to improve income by increasing ancillary forms of revenues. Baggage fees have been one of the main drivers of profitability for many airlines. Airlines are adding various new features to help boost revenues such as WiFi, in-flight entertainment, and improvements in lounge facilities.
According to a recent Amadeus/IdeaWorks study, North American airlines collectively produce the largest stream of ancillary revenues compared to other regions, with an estimated $15 billion in revenue in 2011. This represents a 70% jump over 2010 levels, with the majority of the increase attributable to stronger merchandising efforts by the carriers as well as addition of more à la carte services for sale.
The study also revealed that around 50% of ancillary revenues for the U.S. airlines is generated by the sale of frequent flier miles, notably those linked to co-branded credit card activity.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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