Aggressive Cost Management And Decisive Expansions Set To Propel Airline's Margins And Growth

Key Takeaways

• Aggressive cost management and domestic capacity reduction are set to improve net margins by aligning supply with demand.
  
• Investments in operational excellence and premium product offerings aim to enhance customer experience and drive higher-margin revenue growth.
  
• United Airlines Holdings' strategy to cut unprofitable flights and premium cabin focus faces sustainability and execution risks amid competitive fare pressures and uncertain demand recovery.

Catalysts

Through its subsidiaries, provides air transportation services in North America, Asia, Europe, Africa, the Pacific, the Middle East, and Latin America.

• United Airlines Holdings is implementing an aggressive cost management strategy and plans to reduce domestic capacity by 300 basis points in Q4 2024, which should positively impact net margins and earnings by better aligning supply with demand.
  
• The company anticipates industry domestic capacity growth moderation, which is expected to benefit United Airlines by creating a more favorable competitive environment and improving yields and revenues as they progress into 2025.
  
• Investments in operational excellence and a strong safety culture have led to record operational performance, driving efficiency benefits to the bottom line. This focus on operational reliability is likely to continue enhancing customer experience, improving on-time performance, and reducing operational disruptions, positively impacting revenue and net margins.
  
• United Airlines’ focus on premium product offerings and customer experience, including the introduction of new features and amenities, aims to differentiate the airline in the competitive landscape. This strategic approach is expected to drive higher-margin revenue growth by attracting and retaining premium customers.
  
• The United Next plan, emphasizing fleet modernization and network expansion, supports long-term growth expectations. Despite current industry challenges, the plan's ongoing execution positions United Airlines to structurally and permanently improve its market position, potentially leading to increased revenue and earnings growth over the coming years.

Assumptions

• Analysts are assuming United Airlines Holdings's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.3% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $3.3 billion (and earnings per share of $9.96) by about August 2027, up from $2.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.4 billion in earnings, and the most bearish expecting $2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2027 earnings, up from 4.7x today. This future PE is lower than the current PE for the US Airlines industry at 10.1x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.56%, as per the Simply Wall St company report.

Risks

• The rapid response to eliminate unprofitable domestic flying and the strategic domestic capacity reduction of 300 basis points in Q4 2024 might not be sustainable if competitors do not maintain discipline, potentially affecting net margins through continued fare pressures.
  
• United's reliance on an upswing in demand to counterbalance additional industry domestic capacity, which pressured yields in Q2 2024, could challenge revenue growth if consumer spending does not increase as anticipated.
  
• A significant portion of United's revenue improvement relies on the premium cabin and business travel recovery, which if not sustained or slower to recover, could impact overall revenue and profitability margins, especially given the focus on expanding premium services.
  
• The challenges in the Pacific region, particularly with diminished demand for flights to China and operational complexities due to the inability to overfly Russia, might continue to affect international PRASM and overall earnings.
  
• The investment in operational excellence and technology to improve recovery from irregular operations, while positive for cost efficiency, carries execution risk. Failure to achieve or sustain the anticipated cost improvements could impact CASM-ex (Cost per Available Seat Mile excluding fuel) and overall financial performance.

Valuation

• The analysts have a consensus price target of $69.31 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 $100.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $62.6 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of $41.76, the analyst's price target of $69.31 is 39.7% 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.