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Analysis: United Stock Plunges After Q3 Earnings

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Analysis: United Stock Plunges After Q3 Earnings

Analysis: United Stock Plunges After Q3 Earnings
October 19
18:16 2017

CHICAGO – United Airlines reported a net profit of $637 million for the third quarter (Q3) of 2017, down 34.0% year-over-year (YOY). The drop was driven mainly by a 6.0% YOY increase in operating expenses to $8.79 billion and a 0.4% YOY drop in operating revenue to $9.88 billion.

The overall jump in operating expenses was mainly driven by a 7.1% YOY jump in labor expenses to $2.81 billion and a 12.9% YOY increase in fuel expenses to $1.81 billion.

As a result, the carrier’s operating margin dropped to 11.1% from 16.4%. United also estimated that the impact of Hurricanes Harvey (which impacted United’s hub in Houston), Irma, and Maria during the quarter cumulatively reduced revenue for the quarter by $210 million.

United’s shares are taking a beating


As of press time, United’s stock price (NYSE: UAL) was down $8.18 or 12.04%, which is one of the biggest if not the biggest single-day share price fall for a US airline in the last decade-plus.

Essentially, investors were not impressed with United’s raw financial figures, nor it’s forward guidance for earnings, capacity, and revenue over the next few quarters.

Since the arrival of Scott Kirby as United’s president, United has taken a much more aggressive public stance about growth. Kirby clearly believes that United has a strategic opportunity to grow in the domestic market with his posturing about growth against American in Chicago O’Hare and against American, Delta, Southwest, and Alaska in Los Angeles (this one makes less sense).

He has overseen the substantial moves towards the re-banking of United’s operations and more recently an increase in international capacity (Houston-Sydney and a ton of new seasonal trans-Atlantic routes were announced in Q3 alone) after years of decline.

Unfortunately for Kirby, Wall Street doesn’t share the same enthusiasm for growth at United. Investors are notoriously (and I would argue mistakenly) gun-shy about capacity growth even in the current fuel price environment.

And at least cosmetically, the major drop in United’s profits in Q3 2017 (normally the peak quarter for a US airline) would appear to validate these concerns from Wall Street analysts.

But when you dig deeper into the drivers behind the drop and the context of the US airline market around United, it becomes clear that growth may well be the only way for United to grow profits.

On paper, the analysts would argue that United could merely cut capacity to boost PRASM, but this is where the double-edged sword of United’s network comes into play. Because it has hubs in such large, attractive metro areas, it is always going to attract a ton of competition.

So while Delta, for example, can cut capacity in Detroit to increase average fares, when United cuts capacity in San Francisco it will instead lose that traffic to Alaska/Virgin America and thus suffer a drop in revenue.

Moreover, on the labor side, United’s biggest cost increase driver was the long-overdue pay increase for its workers. The only way to offset that on a per-ASM basis is to make each United worker more productive, by boosting capacity.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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2 Comments

  1. sawdust21
    sawdust21 October 20, 05:22

    Personally, I think all stock analysts are full of you-know-what. Notice the first four letters of analyst? That being said, yes, United has some issues as compared to other airlines, like Delta, for instance. And you can call me an idealist, but a $637M profit and the stock plunges? Take that number and extrapolate it to your household or small business. What if you had the comparable number of “profit” at the end of the quarter that you put away in savings, instead of more debt? You would be ecstatic. The stock market is nothing but a institutional casino. And kudos for taking care of their employees. It affected their bottom line in this report but hopefully will help the bottom line in a positive way in the future as employees are the foundation of any corporation.

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