VALUATION HIGHLIGHTS

1. Passenger constitutes 49% of the Trefis price estimate for United Airline Holdings's stock.
2. Other constitutes 36% of the Trefis price estimate for United Airline Holdings's stock.
3. Cargo constitutes 15% of the Trefis price estimate for United Airline Holdings's stock.

WHAT HAS CHANGED?

UAL Stock Performance

UAL stock has witnessed gains of 10% from levels of $45 in early January 2021 to around $50 now (mid-April, 2024), vs. an increase of about 35% for the S&P 500 over this roughly three-year period.

However, the increase in UAL stock has been far from consistent. Returns for the stock were 1% in 2021, -14% in 2022, and 9% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that UAL underperformed the S&P in 2021 and 2023.

Q1 2024 Earnings

UAL reported net sales of $12.5 billion, up 9.7% y-o-y. This was led by increased capacity, with average seat miles up 9%, and passenger revenue per seat mile, up 1%. UAL reported an adjusted loss of $0.15 per share, compared to an adjusted loss per share of $0.63 in the prior-year quarter.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of UAL that present opportunities for upside or downside to the current Trefis price estimate.

United Mainline

United's Mainline Passenger Yield: United's passenger yield stood at around $0.194 as of 2022. However, we expect the competition to ease, causing the airline's passenger yield to grow steadily to $0.199 by the end of the Trefis forecast period.

If, however, passenger fares rise more than anticipated, either due to higher crude prices or due to strong growth in demand for flights, and take yields to $0.250 by the end of the Trefis forecast period, then there could be a potential upside of 20% to the Trefis price estimate for United Airline Holdings's stock.

BUSINESS SUMMARY

United Airlines Holdings is one of the largest passenger airlines in the world, operating an extensive domestic and international network that spans the Americas, Europe, Asia-Pacific, Africa, the Middle East, the Caribbean, and Australia.

The carrier owes its current size to the October 2010 merger of United and Continental, with the United brand continuing. Together with its regional partners, United today operates more than 5,500 daily flights to more than 375 U.S. and international destinations. The carrier has hubs at New York, Chicago, Denver, Houston, Cleveland, Los Angeles, Guam, San Francisco, and Washington Dulles.

In addition to passenger flight service, United also provides cargo transport services from its passenger aircraft. The carrier, apart from providing independent passenger flight service, also has alliances with many regional and international carriers to expand its service network.

United is also a founding member of the Star global airline alliance.

SOURCES OF VALUE

Extensive service network

United has one of the largest service networks among U.S. airlines. A large service network enables the carrier to attract corporate travelers to its loyalty program that supports higher yields as many corporate travelers opt for first-class travel.

KEY TRENDS

Oil prices significantly impact bottom line

Fuel expenses constitute the single largest cost head for airlines, making them vulnerable to hikes in crude oil prices. For United, fuel costs constitute around a third of its total operating expense. To reduce vulnerability to fuel price volatility, United engages in fuel price hedging.

Demand for flights is related to global economic growth

Demand for flights is highly correlated to global economic growth. Thus, a decline in economic growth or recession reduces demand for flights, impacting passenger traffic for airlines. On the contrary, steady growth in the global and U.S. economy grows demand for air travel, allowing airlines to raise their airfares, occupancy rates, and profits.

Focus on ancillary revenue

Many airlines, including United, are figuring out ways to grow their top lines through ancillary heads such as baggage fees, access to on-board WiFi/food/drinks, etc. Accordingly, airlines are investing in enhancing their product offerings that include in-flight WiFi and other entertainment options, improved lounge facilities, and extra-legroom seats.

According to an Amadeus/IdeaWorks study, North American airlines collectively produce one of the largest streams of ancillary revenues compared to other regions. A majority of the increase is attributable to stronger merchandising efforts by the carriers, as well as the addition of more à la carte services for sale.

Growing preference for low-cost carrier model

During the past decade, low-cost carriers such as Southwest and JetBlue have gained significant market share in the U.S. Looking ahead, we believe these low-cost carriers will likely continue to grow their market share, as their lower fares attract passenger traffic.

Consolidation in the industry has helped raise profits of all airlines

The U.S. airline industry has seen many mergers and acquisitions in the last decade, including the five big combinations of US Airways and America West, Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways.

A more consolidated industry has worked to improve the profits of all airlines. A fewer number of players in the market has made it easier for these remaining airlines to add capacity with restraint. Prior to this consolidation in the airline industry, individual airlines were adding capacity at higher rates in an attempt to grow their market shares. This rapid capacity addition resulted in an oversupply of seats, reducing the margin and profits of all carriers.

Going forward, we believe as long as airlines add capacity with discipline, the industry should remain profitable.