What To Expect From United’s Q1 Earnings

United Continental (NYSE:UAL) reported better than expected earnings last time around. The company managed to post a 43% increase in earnings year over year, despite the heavy increases in average fuel costs, due to the recent tax cut. Even revenues came in higher than expected at $9.44 billion, representing a 4% increase year over year.

Despite this, the company saw its shares tumble after the call as management revealed plans to increase capacity in the coming quarters. This is a point of concern as strong increases in seat counts coupled with modest jumps in revenue could seriously challenge United just as it faces higher costs, such as fuel.

Over the last 4 weeks, United’s value has declined by about 5.8%. That said, we believe the current price to be undervalued by about 15%. In this respect, we have created an interactive dashboard analysis to estimate the company’s valuation based on its expected revenue for FY 2018. Click on the link to modify the figures to arrive at your own price estimate.

For Q1, analysts expect revenues to come in nearly 7% higher year over year to reach $9 billion. On the other hand, United’s earnings are expected to fall 5% from the year-ago period to hit around $0.38 per share.

Highlights:

• In the to-be-announced quarter, we expect United to deliver good top line growth driven by increased passenger revenues owing to strong demand for air travel. In this respect, the company has issued a rather bullish outlook in respect to its PRASM expectations. For Q1, management sees the key metric increasing by about 2.7% year over year. The consensus estimate calls for the metric to come in around 12.46 cents. However, it would be important to note that unit revenues in the quarter are also being aided by a lower completion factor owing to increased flight cancellations on adverse weather conditions.
• In contrast, we expect earnings to take a hit in the Q1 on increased fuel and labor costs. The consensus belief is that fuel costs are expected to come in at $2.11 per gallon, which is almost 10% over the price in the last quarter. In general, oil prices were up almost 8% in the January-March period. Additionally, the bottom line is also expected to be hurt on increased wage related costs. For Q1, the company expects to report unit costs to the tune of 0.6% higher.
• As mentioned above, the company has decided to increase capacity at a rate of almost 4-6% in FY 2018, which is about 50-250 basis points higher than the total capacity increase last year. In general, we expect this to have a huge impact on pricing. Analysts across the board are worried that this could lead to an oversupply situation that forces key players to further discount (already low) ticket prices in order to compete efficiently. We expect to learn more about this on the upcoming earnings call.