United Continental Beats Expectations On Improved Operational Efficiency And Higher Demand

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UAL: United Airlines Holdings logo
UAL
United Airlines Holdings

United Continental (NYSE:UAL) results beat expectations in the fourth quarter, with earnings per share coming in 24% higher ($2.41 vs $1.96) above analysts’ expectations, and 67% higher yoy, this despite the fact that airline fares fell 2.6% yoy. This brings full year adjusted earnings per share to $9.18 for the year, a 30% increase yoy. Revenues came in at $10.49 billion, which is an increase of 11% yoy and bringing annual revenues to $42 billion. Revenue per Average Seat Mile (RASM), saw gains coming in 3% higher yoy for the quarter.  With improvements in employment and consumer confidence, domestic demand was especially strong rising 12% yoy.

We currently have a price estimate of $101 per share, which is higher than the market price. You can use our interactive dashboard, UAL’s 4th Quarter, to modify key drivers and visualize their impact on the price estimate.

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The company’s CEO had at the start of the year recommended to the board to increase capacity by 6%, in hindsight this clearly was the right move. As the airline saw increased traffic flow throughout the quarter, and year. The company was able to achieve 4.3% in RASM, and 4.9% increase in capacity for 2018.

A key feature of the company’s out performance has been the ability to recoup all of the fuel costs, in fact the company was about able to recover 100% of its cost for the year. Despite the increase in fuel costs. cost per average seat mile (CASM) fell by 1% for the year. This was largely due to improvements in logistical efficiency. and route efficiency programs that United embarked upon throughout the year. Going into 2019 the company will continue to introduce newer routes, and improved aircraft. This should help push earnings further. With consumer confidence historically high, continued expansion, and improvements in operations, this should see the airline do well over the next 3-4 quarters.  With changes to its routes, and introduction of newer aircraft, the company should see margins improve going forward, and see the company return to margin growth.

United Continental has focused on premium passengers throughout the year, and this strategy played a key part in increasing revenues, while allowing the airline to re-coup most of the increase in fuel costs (fuel costs came in at $2.4 billion for the year).

The company has guided capital expenditure at $4.7 billion in 2019, this is up 11% on an annual basis. In addition, the company currently has a return on equity of 24%, this could rise to 26% in 2019 should the company be able to continue to execute its strategy. Return on invested capital could increase to 13% next year, as cash flows improve.

United Continental also continues to be one of the most preferred airlines according to consumer surveys. All of this means the company may see $10-12 EPS into 2019, which means our price estimate of 101 dollars per share which is 16% higher than the current price, may well be achieved, should United continue performing well. It should be noted that we expect oil prices to remain in the $60-$65 region for 2019. Overall the company is well placed, going into 2019 and we expect trends seen in 2018 to continue.

 

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