United Airlines: What To Expect From Earnings

Earnings season has kicked off with Delta Air Lines, Inc. (DAL) reporting its Q1 results. Despite providing solid numbers and maintaining full year guidance, DAL stock is still trading down. A day earlier, American Airlines Group Inc. (NASDAQ:AAL) stock tumbled more than 9% after issuing preliminary results that disappointed analysts and investors, which I believe was mostly related to analyst expectations being set unrealistically high. In some way, it seems a lot like airlines have to guide extremely strong for quarters ahead and show extremely strong Q1 results in order to satisfy the market.

In this report, I will be looking at what United Airlines Holdings, Inc. (NASDAQ:UAL) expects for the first quarter and how that stacks against analyst estimates. United Airlines will report first quarter results on the 18^th of April after market close, with an earnings call scheduled for the next day.

United Airlines Guides Down On Q1 2023 Earnings

*Not reflected in the guidance is the impact of the cost timing on margins, which should put the pre-tax margin in the negative 2 to 4 percent instead of negative 2 to 3 percent as United shared in a correction filing.

Without going through the guidance line by line, we can already say that United Airlines is different compared to that of Delta Air Lines and American Airlines. Delta Air Lines maintained its guidance in March, while American Airlines increased its guidance in April. United Airlines was the only out of the major three carriers that actually guided down. It already did that in March, and so what we do see is that while the market dynamics are the same, the guidance directions are vastly different. Whether United Airlines actually guided down to lower expectations only to blast past them remains to be seen.

Overall, the revised guidance is driven by higher capacity in the first quarter that does not seem to be favorable for the unit revenues. United Airlines guided capacity to be up 23% year-over-year from an earlier capacity increase of 20%. One would think that would mean a boost to Q1 guidance. That is not the case. A worrying way to look at things is that capacity is growing in excess of unit revenue growth, which could be a worrying indicator that, as capacity is being added, the unit revenues weaken. United sees it more in a disconnected fashion, it seems, indicating the capacity increase is driven by better-than-expected completion rates.

The lower TRASM guidance is driven by seasonality patterns. Basically, low demand months see less growth in demand than high demand. Q1 is naturally a weak quarter, so that has driven down the expectation for unit revenues, but as we head into Q2 with a better demand profile, we should see some additional growth driving mid-teens revenue growth expectations for the second quarter. So, we already have somewhat of an indication for the second quarter, and it will be interesting to see whether United will maintain that guidance as it releases Q1 results as well as its guidance for the second quarter.

Driven by the costs of a new collective bargaining agreement with employees and the timing of that agreement from Q2 to Q1, the unit costs are now expected to be more or less flat or 1% lower compared to a 3 to 4 percent improvement expected earlier. This is together with higher fuel prices that drove down the margin expectations from 3% to a loss margin of 2 to 3 percent and a loss per share of $0.60 to $1 per share, whereas previously a $0.50 to $1 per share profit was expected.

When just viewing the numbers, it looks a lot like Q1 capacity expansion is going at the expense of unit revenues while costs are higher. That doesn’t provide a nice backdrop for airlines. The reality, however, is that the completion rate in Q1 was higher, but with the timing of the collective labor agreement and higher fuel prices, there is some pressure on Q1 but the CLA impact and the TRASM growth being lower are timing issues. That is also why United expects mid-teens growth in operating revenues for the second quarter and has maintained its full year guidance of $10 to $12 per share with a pre-tax margin of 9%. So, the airline is still guiding for a very strong year.

What Are Analysts Expecting?

For the first quarter, analysts are expecting $11.43 billion in revenues up 51% YoY, which is in line with the revenue growth that United Airlines has guided for. Since United Airlines provided its updated guidance in March, EPS estimates have been coming down to a $0.73 per share loss from an expected profit of $0.68 per share. Overall, it seems that airlines have to hit a home run on earnings and guidance to satisfy investors. However, as I pointed out, for American Airlines the expectations were simply set too high, while Delta saw some lower capacity during the quarter affecting its quarterly results. United Airlines had already provided some on Q2, expecting mid-teen revenue growth, leading analysts to increase EPS estimate for the second quarter to $3.62.

We can’t predict how the market will react. However, perhaps, with the additional color that United Airlines already provided earlier for the second quarter and the strength that Delta sees going forward, we won’t see any significant share price retraction as we saw with American Airlines.

Is United Airlines Stock A Buy Or Sell?

In a piece published in February, I upgraded United Airlines stock to buy from hold. That was not so much driven by the subject of that report which was an investment in a sustainable aviation fuel fund, but it was driven by continued expected strength this year as well as United Airlines positioning for the long term with its Next fleet renewal program. Fuel prices have trended up recently, and next generation aircraft as United Airlines is absorbing now provide a damper on fuel consumption. The airplanes will not be delivered to United the next day after ordering, but having cost efficiency in mind is important. Procuring fuel efficient airplanes is, of course, an important part of controlling costs where they can be controlled.

Conclusion: United Airlines Shares Offers Significant Upside

While it seems to be extremely difficult for airlines to please the market right now, I continue to believe United Airlines stock offers significant upside and, therefore, I am maintaining my buy rating on the stock. United Airlines has already guided down for Q1, and whether they beat or miss analyst expectations, what counts for me is that they have already provided some color on Q2, making it clear that some of the Q1 strength earlier expected is flowing into Q2 and some costs that were expected in Q2 are flowing into Q1. The company has already reaffirmed its targets for the full year despite these timing issues, showing the market that it is indeed a timing issue and not a weakening in demand.

Obviously, the year is long and the market can change, but I don’t expect a meltdown as we saw with American Airlines stock. This is because United was quick to dial down expectations driven by timing of demand and costs, plus the expectations for American Airlines were simply too high. Perhaps United Airlines Holdings, Inc. providing some insight into Q1 performance so late also caused a more aggressive stock price reaction. What I continue to keep an eye on is continued demand strength, because with higher labor costs locked in, having a continued strong environment for air travel demand is of utmost importance.