Strong Execution and Favorable Industry Fundamentals Support United Airlines’ Bullish 2023 Outlook

United Airlines Stock at a Glance

• Current Morningstar Fair Value Estimate: $59
• United Airlines Stock Star Rating: 3 Stars
• Economic Moat Rating: None
• Moat Trend Rating: Stable

United Airlines Earnings Update

United Airlines (UAL) financial performance improved throughout fiscal 2022, and the no-moat-rated airline finished the year with a strong fourth-quarter performance that topped FactSet consensus revenue and EPS estimates. Furthermore, the airline issued better-than-expected fiscal 2023 financial guidance. Notably, management expects the airline will achieve about a 9% pretax margin in 2023 with EPS of $10.00-$12.00. Previously, we had projected it would take the airline several years to achieve this level of profitability. After updating our valuation model to account for stronger near-term financial performance, we’ve raised our fair value estimate approximately 4% to $59 per share.

United added capacity in 2022, but full-year available seat miles, or ASM, (a measure of capacity) was still about 13% lower than in 2019 (prior to the pandemic). However, management expects ASMs to increase by a high-teens percentage year over year in 2023, which means capacity should exceed 2019 levels this year. United is making a substantial investment in its aircraft fleet (the airline plans to add 700 narrow and widebody aircraft by 2032), which we think will continue to increase capacity over our five-year explicit forecast.

United’s profitability substantially improved as the year progressed with the fourth quarter, marking the second consecutive quarter with over an 11% adjusted operating margin. Management sees a favorable operating environment over the midterm supported by strong demand and industrywide undercapacity and is targeting a 14% pretax margin by 2026 (compared with 9% in 2023). Based on our records, a 14% pretax margin would be an all-time record for the airline. Considering industrywide capacity investments and competitive dynamics (we view airlines as a no-moat industry), we have a more conservative profit margin outlook for United and instead model a 9% midcycle pretax margin.