What To Expect From United Continental’s 3Q’18 Earnings Despite Crude Headwinds?


United Continental (NASDAQ:UAL) is expected to report its earnings on 16th October after the market close. UAL operates approximately 4,600 flights to 357 different airports. The airline operated 1.6 million flights carrying 148 million passengers in 2017. The market expects the UAL’s 3Q’18 revenue to be $10.78 billion. Accordingly, the earnings for the quarter are expected to come in at $3.06 per share, representing an increase of 37% on a year-on-year basis.

We currently have a price estimate of $96 per share for the company, that is 12% higher than the market price. View our interactive dashboard for United’s Outlook For 2018 and modify the key drivers to visualize the impact on UAL’s price.

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UAL’s strategy to maximize margins and to increase efficiency over the past quarter has led its stock to be the top performer for the current year. Consequently, the company has provided a bullish third quarter estimate with expectations of passenger unit revenue increasing in all its sectors in a range of 4-6%.

Additionally, the rising crude oil prices are likely to weigh on UAL’s margins during the third quarter. That said, the company’s pre-tax margins are expected to come in at 8-10%, despite the increasing fuel cost environment. To offset the higher fuel charges, the legacy carrier has increased its baggage fees from $25 to $30 for the first bag and from $35 to $40 for the second bag. This comes on the back of Congress choosing not to enforce fee structures through the federal aviation commission. Since airline baggage fees are not as price sensitive as airline ticket prices, it should provide momentum to the company’s bottom-line in a rising fuel cost environment and could be a sustainable strategy for the company in the short term.

In the latest month of September, the traffic increased by 6.7% and capacity expanded by 6% on a y-o-y basis. Furthermore, the company transported 8.5% more passengers during the month. Mainline completion factor also increased to 99% from 97% from the previous quarter.

UAL has been trying to regain market share and has done so by increasing capacity in recent times. It was previously believed that this would lead to an all-out fare war. Currently, the consensus is that (despite attempts by UAL to gain market share), there are few signs of a price war breaking out.

In conclusion, UAL’s results are expected to continue their positive trend despite the crude oil headwinds, mainly owing to operational efficiencies, and better targeted strategies that aim to increase business in areas which are not as price sensitive as airline tickets.

 

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