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Morningstar | New management will improve the carrier, but United's flight to higher profits will be turbulent.

The 2008 downturn started a shift in the U.S. airline industry, as high fuel prices and restrictive credit markets protected the industry from new entrants. More important, airlines like United Airlines merged with other carriers, rationalizing the market. Combined, the big four U.S. carriers, which include United, now control more than 80% of the U.S. domestic market. This consolidation alleviated overcapacity, and 2015 saw all-time highs for margins as fuel prices fell but fares held up. However, this situation looks to be coming to an end as less restrictive credit markets, available aircraft to lease, and lower fuel prices have encouraged expansion. Although U.S. network carriers' are constraining capacity (with the notable exception of United), ultra-low-cost carriers still expect to expand by double-digit percentages. Moreover, LCCs continue to grow internationally thanks in part to new technology, presenting a threat to United's profitable international routes. We think United's future centers on the new management team and its ability to turn around operations while competing against legacy carriers and fighting off low-cost rivals. United enjoys an attractive route network, with hubs in the five largest U.S. markets, and plans to optimize operations at its Denver, Houston, and O'Hare hubs over the next few years. The carrier is also upgauging its fleet to larger, more comfortable, and more efficient aircraft in order to recapture corporate travelers. On the other hand, United remains at the mercy of an industry plagued by a history of overcapacity and price wars.While we like management's hub optimization strategy, we think United still has a long row to hoe to right its operations, and these fixes will probably entail near-term pain in the form of capacity growth, which will hit unit revenue growth. Despite the recent departure of CFO Andrew Levy, we think that president Scott Kirby and CEO Oscar Munoz can right the ship. Moreover, while we still posit that airlines lack a moat and face continuous pricing pressures, we believe the consolidated U.S. airline industry will remain profitable over the full cycle.