EUR 850.00 For Business Accounts Only

Morningstar | United Shares Fly Higher After 4Q Results, but Our FVE Remains Unchanged

No-moat United’s fourth-quarter results were well-received by the market, and shares traded dramatically higher on solid unit revenue growth, despite robust capacity growth. United dispelled fears that burgeoning headwinds highlighted by peers would force the carrier to miss expectations and deviate from its expansion plans through 2020. During the fourth quarter, United bolstered midcontinent connections and regional networks while growing revenue per available seat mile flown, PRASM, by 5% against the same quarter last year. At the same time, capacity jumped 6% year over year. While United’s results surpassed consensus expectations, United’s mid-single-digit capacity growth, paired with a slowing air travel environment and higher full-year oil prices, narrowed pretax margins to around 8% for 2018, as we expected. As such, we see no reason to revise our long-term thesis and will leave our no-moat rating and $87 fair value estimate unchanged. Through our 2022 midcycle period, we expect yield growth will deteriorate, with oil prices gravitating toward our $60 forecast Brent price and demand will cool as airlines exit a record expansionary period.

In 2018, robust passenger yield growth (2.9%) and PRASM growth (4.4%) curbed the impact of rising oil prices and helped the carrier meet its pretax margin targets. During the final quarter, we expected 6% capacity growth would yield 3% PRASM growth over the same quarter last year, but United registered PRASM growth closer to 5%, thanks to healthy yields from Pacific markets and strong domestic demand for premium products. Assuming United will take advantage of lower oil prices, management believes its guidance is achievable with oil prices between $40 and $80 per barrel, we expect capacity growth will end 2019 closer to 5% (previously 4.5%). Also, we expect margins will expand, with the carrier’s fuel bill declining by about $1 billion over 2018, thanks to suppressed oil prices.

United’s rollout of new revenue products, network optimization, and implementation of the Gemini revenue management system proved successful in 2018, adding about 3 percentage points to year-over-year PRASM growth in the final quarter and curbing the impact of 5% capacity expansion through the full year. We assumed the carrier’s expansion pursuits would drive nonfuel unit cost growth well above inflation, but this hasn’t materialized. Nonfuel CASM, unit costs excluding fuel, profit sharing, and special charges decreased 0.7% in the fourth quarter and almost 0.2% over the full year. We forecast 2% nonfuel CASM growth in the coming fiscal year, which counters management’s flat to negative guidance, but we expect cost inflation will decelerate to 1% through our midcycle period. Contracted raises for pilots and looming labor deal negotiations with the group underpin elevated unit cost growth for 2019 in our model.