United Airlines gaining some altitude after nudging Q3 guidance higher (UAL)

With a frenetic peak travel season winding down, it appears that the incessant demand for air travel is not tapering off, based on United Airlines (UAL) updated 3Q22 guidance. After initially guiding for revenue and TRASM (Total Revenue Per Available Seat Mile) growth of 11% and 24-26%, respectively, UAL is now forecasting increases of 12% and 25%. The bump higher in UAL’s revenue guidance is modest, but it eases concerns that the macroeconomic headwinds that have pressured many retailers will start hurting travel demand this fall.

However, the main story that emerged from a disappointing earnings season for the airline industry revolved around rising costs and capacity limitations, not demand. Recall that UAL badly missed Q2 EPS expectations, despite achieving its highest Q2 revenue in its history at $12.1 bln. Staffing shortages within UAL, and across various airports, restricted the company’s ability to add flights. Consequently, UAL’s capacity in Q2 declined by 15% compared to 2Q19. With fewer available seats to spread its costs across, UAL’s CASM-ex (cost per available seat mile, excluding fuel) increased by 17% versus 2Q19.

Encouragingly, UAL is now experiencing improved operational reliability, while costs are “inline to slightly better” than its prior expectations. This suggests that staffing levels are starting to more closely align with demand, enabling UAL to avoid more costly cancellations. Still, the improvements are pretty marginal at this point, as reflected in the revised Q3 outlook.

  • Capacity is now expected to be down by 10-11% versus 3Q19, compared to the prior guidance of down 11%. There was no change to UAL’s capacity guidance for FY22 or FY23, which calls for a decrease of 13%, and an increase of “no more than 8%”, respectively.
  • Due to the slightly enhanced capacity forecast for Q3, UAL now anticipates CASM-ex to be up around 16% versus its previous guidance of up 16-17%. Although UAL didn’t provide CASM (including fuel) guidance, it did disclose that average aircraft fuel price/gallon is trending roughly in line with its expectations at $3.83.
  • As a result of the above, adjusted operating margin guidance was nudged higher to 10.5% from 10.0%, putting UAL on track to be profitable in FY22.

Although the revisions to UAL’s Q3 guidance are rather slight, the update brings a sense of relief that business conditions haven’t further deteriorated since UAL and its peers’ reported earnings in late July. In UAL’s Q2 earnings press release, CEO Scott Kirby struck a cautious tone, warning that the economy may slow — and potentially enter into a recession — in the near-to-medium term. He also highlighted the industry-wide operational challenges that were constraining capacity, and the record high fuel costs, as key risks that could derail UAL’s recovery. While those risks have not dissipated, the brightening outlook for Q3 shows that conditions have become a little smoother, rather than more turbulent.

Source: Briefing

Disclaimer: This content is only intended for informational purposes. Before making any investment, you should always do your own research and analysis.

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