United Airlines (NASDAQ), one of the world’s largest airlines, has seen its shares rise over 20% this year after a 43% decline over the past five years. Despite numerous challenges, including the Covid-19 pandemic and Boeing-related issues, United Airlines has shown resilience and a clear plan for growth and profitability. With strong recent financial results, effective cost management, and solid free cash flow, United Airlines shares present a buying opportunity, particularly given their current discount to peers.
Company Overview
United Airlines, headquartered in Chicago, operates a fleet of over 950 aircraft, serving more than 350 destinations worldwide. The airline, which traces its roots back to 1926, has grown through both organic expansion and mergers, including the notable acquisition of Continental Airlines. United’s extensive route network and strategic hubs, such as Chicago O’Hare and Newark Liberty, provide a competitive edge in connecting domestic and international destinations, despite facing competition from both low-cost and full-service carriers.
Growth Amidst Challenges
United Airlines has navigated through a tough period marked by the Covid-19 pandemic and problems with its Boeing fleet. Despite these hurdles, the airline is focused on profitable growth by launching new, lucrative routes. As CEO Scott Kirby highlighted, United has adjusted its fleet plan to reflect realistic delivery schedules from manufacturers, and it aims to capitalize on growth opportunities in its mid-continent hubs and profitable international routes.
The recovery in air travel is evident, with United poised for a record-breaking summer and a 6.3% growth in passengers predicted for U.S. air carriers this year. However, challenges remain, such as Boeing’s production issues and an FAA operational freeze, which have impacted United’s capacity plans. Nonetheless, United is confident in overcoming these obstacles, with proactive measures to ensure safety and maintain growth.
Q1 2024 Financial Results
United Airlines reported strong Q1 2024 results with revenue of $12.5 billion, a 9.7% year-on-year increase, surpassing expectations. Despite a 7% drop in fuel expenditures, total operating expenses rose 8.4%, driven by an 18.4% increase in salaries and related costs. The airline reported a pre-tax loss of $164 million, significantly lower than the previous year’s $264 million loss. Earnings per share were -$0.15, ahead of expectations and last year’s -$0.63.
Importantly, United generated $1.5 billion in free cash flow, reducing its total debt from $37.2 billion to $34.8 billion year-on-year. For 2024, capital expenditure is forecasted at $6.5 billion, down from the initially planned $9 billion, with plans to rebound to $7-$9 billion annually from 2025 to 2027. Despite significant outlays, United targets positive free cash flow over the next three years.
Q2 2024 Outlook
United Airlines is set to report Q2 2024 results in mid-July, with revenue expected to be $15.11 billion, a 6% increase year-on-year. However, earnings per share are projected to decrease by about 20% to $4.01, due to delays in new aircraft deliveries from Boeing, leading to reduced aircraft utilization and higher costs.
Valuation
United Airlines trades at 4.86 times forward earnings, a significant discount compared to the wider market and its competitors. It has an EV/EBITDA of 4.66, lower than peers such as Delta Air Lines (DAL), Alaska Air Group (ALK), and American Airlines (AAL). Despite operational issues and fleet challenges, United’s higher EBITDA margin and lower Net Debt/EBITDA ratio position it well relative to its industry.
Given its solid financial performance, growth prospects, and current undervaluation, United Airlines shares appear to be undervalued compared to peers.
Risks
Investing in United Airlines involves several risks common to the airline industry, including cyclical demand, fuel price volatility, and labor relations. Fuel prices have been relatively stable, and the U.S. economy shows growth, supporting air travel demand. Labor relations could pose challenges, with potential strike actions and demands for higher pay impacting costs.
Conclusion
Despite facing significant challenges, United Airlines has shown resilience and a clear strategy for growth, focusing on profitable routes and effective cost management. The airline’s strong Q1 results, improved financials, and outperforming metrics compared to peers suggest it is well-positioned for future profitability. Given the current undervaluation, United Airlines shares warrant a “Buy” rating.
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