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Morningstar | United Airlines Posts Solid 2Q, Leveraging Strong Passenger Demand; Maintaining FVE of $89

United Airlines posted solid second-quarter results after temporarily solving supply constraints from suspended MAX aircraft, leveraging strong passenger demand, and capitalizing on sub-optimal flying from peers. We’re maintaining our $89 fair value estimate. Total passenger revenue expanded 6% against the backdrop of 3.6% capacity growth, and adjusted pretax margins finished around 12%. With capacity growth at the midpoint of management’s 3%-4% guided range, we lowered our full-year expectations to 4%. Going forward, management expects available seat miles in the third quarter will be 2%-3% higher than the previous year. Domestic and Latin American regions were standout markets in the latest quarter. Strong domestic close-in bookings supported year-over-year unit revenue growth of about 2%, better than the prior quarter. Concurrently, United captured strong demand across most Latin America regions, driving a 9% surge in unit revenue growth over the second quarter in 2018.

United’s 30 737 MAX aircraft will remain grounded into the third quarter, but we expect regulatory agencies will lift the suspension around September, allowing aircraft to be ready for United’s November launch. Our current grounding assumption calls for a 6-9-month suspension, meaning the aircraft should be back in the air by the end of 2019. With the grounding in place, United will lower its capacity growth expectations for the third quarter to 2%-3%. Consequently, we lowered our full-year domestic capacity growth forecast to around 4.5%, from 5%. We also lowered 2019 unit revenue growth to 1%, with management now expecting year-on-year third-quarter PRASM growth of 0.5%-2.5%.

During the second quarter, United’s results saw a boost from soft oil prices that brought average jet fuel prices down over 4% versus last year. Non-fuel unit cost inflation was also subdued, declining 40 basis points year over year. We believe the carrier is still on track to meet our sub-9% adjusted pretax margin forecast for 2019.