United Continental Holdings Inc (UAL): Set To Report Earnings In The Aftermath Of O’Hare PR Debacle

United Continental Holdings Inc (NYSE:UAL), parent of one of the leading US airlines, is under the investors’ radar today with the company’s fiscal first quarter earnings scheduled for the after-hours. The earnings report is coming on the heels of a major PR disaster that has grabbed the world’s attention over the past few days —  a video of police officers brutally dragging out a passenger, on-board a UAL’s flight 3411 leaving the Chicago O’Hare airport for Louisville, has gone viral. Dr. Dao, who was the fourth passenger chosen to be deplaned as UAL had to accommodate four of its employees on the flight, refused to give up his seat, saying he had to see his patients back home. These four passengers had to be removed involuntarily after none of the passengers had volunteered to give up their seats against UAL’s $800 offer.

Earnings and performance

For the first quarter this year, analysts expect an EPS of $0.38 and revenue coming in at $8.38 billion. That compares to a-year-ago quarter’s $1.35 and $8.19 billion in revenue. UAL’s first quarter has historically been a weak performer due to the “structure” of “its route network”, said the company. Other factors behind such a steep drop from the last year’s figure are recovering jet fuel price and a recent hike in labor rates. Substantial decrease in jet fuel costs in the wake of struggling oil prices since late-2014 changed the fortunes of the airline industry, which has been, for long, considered a cash burning machine. The most glaring evidence of investors’ changed perspective has been a multi-billion dollar investment across the airline sector by Warren Buffett, who had previously called the industry a “deathtrap”.

UAL shares jumped nearly 70% in 2014, which was followed by the company reporting an EPS of $11.88 in 2015, compared to the previous year’s $5.06. But the shares rallied only to give up most of those gains by mid-2016 as a decline in unit passenger revenue per available seat mile (PRASM) cautioned investors of deterioration in margins, amid a recovering oil market. However, company shares bounced back to their 2014-highs as earnings and revenue exceeded market-expectations in each of the past three quarters, driven by improvement in pricing and demand environment. Improved business traffic post election has significantly helped UAL in regaining investors’ confidence. In addition, UAL’s ongoing share repurchase program has further supported share prices. The company repurchased $2.8 billion worth of shares in 2016 and had nearly $1.8 billion remaining in the authorization as of the previous quarter’s end. While the O’Hare incident has been a PR nightmare for UAL, airline passengers are found mostly worried about the fares rather than the less than a quarter of a percent chance of being bumped off a flight. And although the incident may cost UAL a few millions with police officers involved also being penalized, it, so far, hasn’t blown out of the proportion in a way that changes UAL’s investment case. Investors would be watching whether UAL delivers on its non-fuel cost reduction promises as fuel- and labor-costs track higher, and how the airline industry’s key performance metric, PRASM, fared for the quarter.

The analysts’ median price target for UAL stands at $81, while the SWS discounted cash model churns out a long-term intrinsic value of $85, based on analysts’ free cash flow projections — a significant increase in capacity across the industry can pressure ticket-prices and cause downward revisions in these estimates.