United Airlines: Their Results Are Upending the Industry

Ticker: UAL

Rating: Underweight

Price Target: $36

Target Date: On-going

United Overview:

United Airlines (UAL), like most of the other airlines, reported numbers recently and they were atrocious. Although their management team stood strong on their long term outlook and growth opportunities, we find it hard to believe those will materialize anytime soon.

Similar to Delta (DAL), UAL’s passenger revenue (PRASM) missed consensus expectations. The total revenue number here was ~$1.6B, 15% lower than the street. We view this sign as troublesome as this is often an airlines core driver of topline revenue growth.  While management, also in the short term, said that the holiday season will bring greater booking (they are already seeing an increase in ticket purchasing) we think this trend will reverse quickly – as we anticipate a) a second wave of COVID to sweep the nation and b) longer term trends to revert to 2020 norms post the holiday season (we think this will be a seasonal effect only – not a launching board).

UAL also, we believe foolishly, was aggressive on their position, relative to the industry, on their ability to rebound. While they understand this will take a while to materialize, we do not stand with them in their view of their company relative to other incumbents. This was notable in their comments most closely related to generating free cash flow (FCF) before their peers. This is in large part due to management being more bullish on a vaccine being readily available relative to what we think. UAL thinks they will start generating positive FCF next year while we believe it is more likely a late 2021/early 2022 event. Keeping that in mind, we have seen tremendous amounts of cash burn, albeit at an improving rate (3Q cash burn was $25M).

All in all, while UAL is making the right steps, necessary to rebound, we remain underweight the name as we believe their exposure relative to other airlines will hurt. This is in large part due to their reliance on international business trips, which we see as the last part of the recovery in global travel. We anticipate domestic travel to start picking back up, but believe global travel will remain depressed for the foreseeable future until a vaccine is more widely distributed.