United Airlines Earnings: Firm Will Weather the Oncoming Capacity Storm

Key Morningstar Metrics for United Airlines

• Fair Value Estimate: $36.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of United Airlines’ Earnings

United Airlines UAL reported second-quarter results that showed more than 5 billion more revenue passenger miles flown than we forecast, though lower prices overall left revenue $680 million above our model, and cost growth left only $200 million more operating profit than we expected. We refined our remaining 2024 forecast to account for tapering capacity growth later in the year, so our overall profit forecast for United did not change materially. We have raised our fair value estimate by $1 to $36 per share to account for the time value of money since our last report.

As airline capacity and costs have grown dramatically over the last few years, an inevitable return to more normal travel demand will leave the industry with too much capacity and destroy profitability. Management has been predicting a shakeout of the leisure airline industry for some time. Discussing second-quarter results, Chief Commercial Officer Andrew Nocella estimated that 10% of US airline capacity today is unprofitable, and that the spread between the most- and least-profitable airlines’ results has never been wider. Nocella indicated that within a few quarters, one or more low-fare airlines (which have been slashing prices to fill planes on routes they cannot operate profitably) will exit the industry or permanently reduce capacity.

We see this as validating our thesis that the airline industry remains highly competitive and that no North American airline can create profits above its cost of capital over the entire business cycle. The airline industry does not create economic profit; indeed, it usually does not break even. We reaffirm that United and its peers have no economic moats. United and Delta Air Lines DAL are likely to retain profitability in the near term, as they have successfully refined their customer segmentation and premium travel offerings while prudently deploying their capacity to draw the most profits within the industry.