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• United's first quarter revenues declined by 60% over the prior year quarter, fairly in-line with the 50% contraction in capacity.
• With the progress in mass vaccination, passenger numbers at TSA checkpoints have observed a strong uptick in the past two months. However, United Airlines top line is expected to decline by 45-50% from 2019 levels, due to low business and international demand in 2021.
• The company reported $26 billion of long-term debt in Q1 FY2020, assisted by multiple debt and equity offerings.
• Ongoing vaccination and revenge tourism during the latter half-of the year is expected to drive revenues and earnings in 2021.
Below are key drivers of UAL that present opportunities for upside or downside to the current Trefis price estimate.
United's Mainline Passenger Yield: United's passenger yield increased from $0.127 in 2009 to $0.164 in 2014. However, due to increased competition in the domestic market, the airline experienced pricing pressure, which led to a sharp fall in its passenger yield in 2016. United's passenger yield declined to $0.159 during the year. However, we expect the competition to ease out, causing the airline's passenger yield to grow steadily to $0.177 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 $0.188 by the end of the Trefis forecast period, then there could be a potential upside of 10% to the Trefis price estimate for United Airline Holdings's stock.
United Continental 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 founder member of the Star global airline alliance.
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.
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 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.
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.
During the past decade, low-cost carriers such as Southwest and JetBlue have gained significant market share in the U.S. Looking ahead, we figure these low-cost carriers will likely continue to grow their market share, as their lower fares attract passenger traffic.
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 figure as long as airlines add capacity with discipline, the industry should remain profitable.