Airline Brand Loyalty And Upgrades Will Secure Future Market Share

Key Takeaways

• Increased brand loyalty and customer experience improvements are set to drive revenue growth and improve margins, even during downturns.
  
• Strategic capacity adjustments and strong international demand position United well for enhanced earnings and shareholder value.
  
• Softer demand and economic uncertainty threaten United Airlines' revenue, profitability, and net margins, with added risks from tariffs and reduced flying capacity.

Catalysts

Through its subsidiaries, provides air transportation services in the United States, Canada, Atlantic, the Pacific, and Latin America.

• United's focus on brand loyal customers is expected to drive revenue growth, as the airline leads in brand loyalty in six out of seven hubs, reflecting a structural change with permanent market share gains. This customer loyalty is anticipated to bolster United’s revenue resilience even during economic downturns.
  
• The ongoing investments in enhancing customer experience, such as opening new clubs in key hubs like Houston and San Francisco and upgrading in-flight WiFi with Starlink, are aimed at attracting more premium customers, which is likely to improve net margins through increased spending on higher-margin services.
  
• United's strategic adjustments in capacity, primarily cutting less profitable off-peak flights and focusing flying during the most productive hours, are intended to maximize load factors and yields. These changes will likely contribute to better earnings and protect margins.
  
• The resilience in international demand, particularly U.S.-origin international traffic, presents a strong revenue growth outlook. Constraints in international capacity due to supply chain and airport limitations may further boost international yields and contribute to higher earnings.
  
• United's disciplined free cash flow generation and opportunistic share buybacks, particularly when the stock is undervalued, are likely to enhance earnings per share (EPS) and provide significant value to shareholders, even amid economic challenges.

United Airlines Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Airlines Holdings's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.3% today to 6.2% in 3 years time.
• Analysts expect earnings to reach $4.1 billion (and earnings per share of $13.37) by about April 2028, up from $3.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.3 billion in earnings, and the most bearish expecting $3.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, up from 6.2x today. This future PE is greater than the current PE for the US Airlines industry at 8.5x.
• Analysts expect the number of shares outstanding to decline by 0.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.07%, as per the Simply Wall St company report.

United Airlines Holdings Future Earnings Per Share Growth

Risks

• The softer macroeconomic environment is driving both market volatility and decreased demand for travel, which could adversely affect United Airlines' revenue and profitability.
  
• The potential for bookings to weaken further from current levels poses a risk to earnings and could lead to a reduction in revenue forecasts.
  
• Economic uncertainties, including potential recessions and their impact on government and business travel, may negatively impact United Airlines' net margins and financial performance.
  
• The company is wary of potential tariff impacts on aircraft acquisition costs, which could increase capital expenses and affect net earnings.
  
• Reducing off-peak capacity and overall flying amid softer demand could lead to decreased revenue and utilization, impacting overall profitability.

Valuation

• The analysts have a consensus price target of $91.928 for United Airlines Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $66.6 billion, earnings will come to $4.1 billion, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 9.1%.
• Given the current share price of $68.93, the analyst price target of $91.93 is 25.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.