We are upgrading our recommendation to Outperform from Neutral on United Airlines, a wholly owned subsidiary of UAL Corporation (UAUA) with a Zacks #1 Rank (‘strong buy’), based on the improved outlook for the airline industry. We believe United Airlines is well positioned for growth, thanks to the improving demand for air travel, capacity cuts, its industry leading unit revenue growth, fleet right-sizing, network optimization, its hedging strategy as well as the merger benefits from Continental Airlines.
We anticipate that the airline industry will benefit from an improving global economy and expect its unit revenue for the second quarter of 2010 to increase, driven by recovering business and international traffic as well as rising fares. United Airlines began to benefit from industry consolidation as well as improved economic conditions encouraged by an increase in business travel and premium service demand.
United Airlines reported a net loss in the first quarter but surpassed the Zacks Consensus Estimate, indicating that its loss has narrowed from the year-ago level. Consolidated passenger unit revenue increased 19.0% year over year with yield improving 12.2% and load factor increasing 470 basis points. Operating expenses increased slightly due to rising fuel costs. Nevertheless, United Airlines continues to strengthen its balance sheet with $3.8 billion of cash and cash equivalents. It generated positive operating and free cash flow of $482 million and $389 million, respectively, in the first quarter.
We believe the company continues to strengthen its network to meet customers’ travel demands, which gives it an advantage over its peers. We expect faster growth for the company in the next four years as the economy gathers momentum and as consumers and business sentiments recover, thereby improving the spending pattern.
With the pending merger of Continental Airlines, United Airlines will become the world’s largest airline with a strong worldwide presence, enhanced capacity and improved service, overtaking Delta Air Lines Inc. (DAL) that acquired Northwest Airlines in 2008. The combined company is expected to generate annual revenues of $29 billion and save costs in the range of $1 to $1.2 billion by 2013.
The U.S. airline industry is characterized by substantial price competition, especially in the domestic markets. United Airlines competes primarily with large carriers like American Airlines, a wholly owned subsidiary of AMR Corporation (AMR), and Delta Air Lines Inc. The company also competes with low-cost carriers like Southwest Airlines (LUV) in both domestic and international operations.
Read the full analyst report on “UAUA”
Read the full analyst report on “DAL”
Read the full analyst report on “LUV”
Read the full analyst report on “AMR”
Zacks Investment Research
