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United Airlines analysis: modern fleet, great potential and high price. How does it stack up against the competition?

David Boulder
16. 4. 2023
5 min read

United Airlines was hit similarly hard as other competitors. Yet it has recovered and is investing really heavily in fleet expansion and innovation. Is this a positive signal for the future?

United Airlines is one of the largest airlines in the world. It operates passenger and cargo flights to some 350 destinations on six continents. It is part of the wider United Continental Holdings airline alliance .

United Airlines merged with Continental Airlines in 2010 and now has a fleet of approximately 1,400 aircraft, including wide-body Boeing 777s and the larger Airbus A330. United Airlines' main base is located at Denver International Airport in Colorado.

United Airlines generates revenue through passenger and cargo traffic from reasonable airfare and surcharges. Passenger transportation accounts for the majority of revenue (nearly 90% in 2019). The COVID-19 pandemic has caused United Airlines huge losses. Flights have been cancelled and revenue is down nearly 75% in 2020 compared to 2019. The company has implemented a number of cost-saving measures, reduced its fleet and partially laid off employees to help reduce operating losses.

Sector

As I mentioned earlier - the airline sector has been hit hard by the impact of the COVID-19 pandemic. Passenger traffic is down by two-thirds in 2020 compared to the previous year. This has resulted in massive losses for airlines, with some even going bankrupt.

However, due to vaccinations and relaxation of travel restrictions, air travel is recovering rapidly. According to the International Air Transport Association (IATA), in 2021, 37% of 2019 passengers were already being carried. In 2022, it was almost at pre-pandemic levels. Aircraft repair and maintenance costs have fallen dramatically during the crisis, allowing airlines to now invest in fleets with lower operating costs. Newer aircraft are also better for the environment due to lower fuel consumption and emissions.

Although the air transport sector is recovering, it is still at risk from new virus variants, vaccination slowdowns and the introduction of new travel restrictions. Despite this, the outlook for the sector remains positive, with projected growth of up to 49% between 2021 and 2024.

Competition

Current situation

Significantly more expensive than competitors at first glance

United has a significantly higher P/E than the competition. But it appears to have good reasons for this.

The company is making significant aircraft purchases that position it very well over the long term, and energy costs should moderate from 2022 levels.

United's fleet is impressive. And it continues to expand it. Source

United's stock significantly outperformed the S&P 500 after the 2008 financial collapse ahead of the 2019 pandemic. While United and other large U.S. carriers needed government assistance in 2008 and 2020, the financial collapse and global pandemic in 2019 are likely to be once-in-a-generation events.

United is taking several actions that should position the company very well for the long term, and the company's below-average margins should be viewed as part of the short-term costs of positioning the company for the future. United is currently upgrading the company's aging fleet and management is spending massively to both replace and add new aircraft. United's management recently announced an order for 100 Dreamliners with an option to purchase an additional 100 aircraft.

This is the largest purchase of wide-body aircraft by a U.S. carrier in history. Obviously, United will have increased costs in the short term to fund these purchases, but with air passenger numbers expected to exceed pre-pandemic levels in 2023 and continue to grow by more than 5%, these capital expenditures should yield significant benefits in the long term.

Passenger volumes are expected to recover to pre-pandemic levels. Source:

United's adjusted operating margin of 5.7% and net margin of 1.6% are well below the company's 10-year averages. United's net margin has been 6% or higher for most of the last ten years. With oil prices likely to be much lower in 2023 and experts predicting that air traffic levels this year should be close to 2019 levels, United's margins are likely to be much higher next year .

Air travel has always been a cyclical industry. Yet the financial collapse in 2008 and the pandemic in 2019 were likely once-in-a-generation events, and unfortunately all airlines, including United, were heavily impacted. Today, United Airlines has a very strong balance sheet with $16.41 billion in cash on hand and operating cash flow of $6.07 billion. The company is also well positioned for massive long-term purchases of new aircraft. Although the higher cost of financing these upgrades and the impact of the Russian-Ukrainian conflict will hurt the company's margins in the short term, United's long-term outlook is optimistic. Unfortunately, the price is also quite high and seems almost absurd compared to some of its competitors.

The main risk for United is a possible recession, as rising interest rates could lead to a downturn in the economy. This could reduce demand for travel as consumers cut back on discretionary spending. Another risk is potentially higher fuel costs. Unexpected supply constraints could increase fuel costs.

EPS has begun to recover after a long period of time. Source

Disclaimer: This is in no way an investment recommendation. It is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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