United Airlines Earnings: Cheap Fuel Saved the Quarter

Key Morningstar Metrics for United Airlines Holdings

• Fair Value Estimate: $36.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of United Airlines Holdings’ Earnings

United Airlines Holdings UAL reported third-quarter results that exceeded Wall Street’s expectations, outpacing our model for operating earnings by $250 million. Since the third quarter of 2023, UAL’s capacity grew by 4%, while cheap fares shrank unit revenue by 1.6% and its structural costs grew by 6.5%.

Why it matters: Were it not for a decline in fuel costs of 13.2% per gallon, we believe the airline would have earned $450 million less in the quarter, missing earnings expectations, reinforcing our view that individual airlines do not control their economic destiny.

• Compared with the third quarter of 2023, the airline spent $350 million less on fuel while every other operating expense line grew, most of them by double-digit percentages.

The bottom line: We are maintaining our fair value estimate of $36 per share for the airline, even after giving it credit for increasing its share of the industry’s profitable traffic. Its structural unit costs continue to rise while the industry evens out our forecast for future free cash flow.

Big picture: We also credit United for its segmentation strategy following the covid-19 pandemic, when traditional distinctions between business and leisure travelers blurred. The airline, along with Delta DAL, can attract some of the most profitable passengers with its multiple premium travel offerings.

• That said, United’s plans to spend north of $8 billion every year on new aircraft and revamping luxury lounges in its top airports in coming years is higher than competitors’ plans, resulting in investments between 70% and 80% of its earnings in capital investments over time.
• United’s segmentation strategy also allows it to sell bargain airfares in its economy seating, competing directly with the likes of Southwest LUV and other discount airlines. But as seen in the second quarter and into July, this exposes the firm to competitive revenue.