United Airlines Continues to Confound Investors and Analysts
Once again, United Airlines (UAL) - Get Report showed both promise and deficiency in an earnings call, the same juxtaposition that has been in place ever since Jeff Smisek took over as CEO following the 2010 merger with Continental.
The carrier's second-quarter report and earnings call left a mixed impression. Some analysts raised their target prices and some lowered rhem. United closed Wednesday at $48.30, up about 1%. "This reaction is called nonchalance," wrote Wolfe Research analyst Hunter Keay.
The stock fell 4.3% early Thursday.
"UAL's earnings last night and call today were apparently largely uneventful which, given recent events, is a nice change of pace," Keay said on Wednesday.
Once again, United urged investors to wait --- this time for what CEO Oscar Munoz called "a thorough self-evaluation of all aspects of the business," with the results scheduled to be announced in the fourth quarter.
Among the assets being analyzed are United's hubs, although so far no one seems to have revived the 2014 conversation, initiated by the veteran airline analyst Bob McAdoo, about closing the Dulles hub and flowing international traffic over to Newark, the leading trans-Atlantic hub.
So it's difficult to assess whether the evaluation will result in meaningful change, or just in the realization that United has the best hubs on both the East Coast and the West Coast and must live or die with economic vagaries in Denver and Houston, center of the intensely cyclical energy economy, and with the harsh competitive challenges of two-hubbed Chicago O'Hare and three-hubbed Los Angeles International. No more easy fixes, like closing Cleveland, exist.
On the plus side, United executives said operations continue to improve dramatically. They said the San Francisco hub continues to add new service -- and in particular, to expand on the recently added Tel Aviv service, which will go to daily and on Shanghai service, which will go to double daily -- and that the carrier continues to sign post-merger labor contracts, riddles that Smisek could somehow never solve.
Yes, they add cost, but for an airline long beset by the perception that service is lagging, fixing operations and boosting employee pay seem like obvious solutions. "The notion that we can't sell anymore because we don't have a very good product is no longer on the table," Munoz said, on the earnings call, adding that improved operations will generate $300 million in income by 2018.
Jim Compton, chief revenue officer, said, "We're seeing the corporate share in our hubs rebounding." The rebound would be a sign that the fear of bad service or late flights no longer deters business travelers from making the most logical travel choice.
On the negative side were the comparisons with Delta (DAL) - Get Report , which reported earnings a week earlier.
United's 14.5% second-quarter margin came in lower than Delta's 22%. United second-quarter passenger revenue per available seat mile fell 6.6% while Delta's fell 4.9%. For the current quarter, United guided to a current quarter PRASM decline between 5.5% and 7.5%, while Delta guided to a decline between 4% and 6%.
Analysts were split in evaluating United results.
Credit Suisse analyst Julie Yates reduced her full-year 2016 earnings estimate to $8.11 from $8.17 a share. (Analysts surveyed by Thomson Reuters estimate $7.99). "Relative to post Q1 in April when the stock was trading at a similar level, PRASM improvement has pushed out again & corporate commentary is incrementally worse," Yates wrote.
Still, Yates hiked her target price to $47 from $43 "to reflect the recent multiple expansion in the group." She retains a neutral rating. Keay cut his target price to $64 from $71, saying, "We were too optimistic on our PRASM assumptions so we tweak that down," but noting, "UAL's change initiatives are more real and more transformative than we previously assumed." Keay has an overweight rating.
Deutsche Bank analyst Mike Linenberg hiked his target price to $60 and his full-year earnings estimate to $7.70 a share. He has a buy rating, "predicated on seeing a narrowing in (year-over-year) PRASM declines, which we think will help restore investor confidence around the company's ability to sustain healthy financial results, especially if fuel prices further escalate."
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.