May 5th, 2024 – Founded in 1926, United Airlines is an international airline company with more than 100,000 employees headquartered in Chicago, Illinois that provides air transportation services worldwide. Its business lines include people transportation, which is the primary source of revenue, and cargo transportation, which offers freight and mail services. These two segments contribute to form the company’s operating income, alongside with other revenue, that includes revenue generated from third-party businesses such as maintenance services and flight academy.
The company’s motto is “Connecting People. Uniting the World” and it is what drives its decision making. Their approach, as reported in their website, is based on seven pillars: safety, environmental sustainability, people and human capital, community, supply chain integrity, cybersecurity, and governance.
The company is also very active on ESG, which stands for environment, social and governance, and has pledged to become net zero GHG emissions by 2050. Nowadays a company’s ESG score is becoming a key metric to observe while investing. Environmental criteria measures how a company safeguards the environment, social criteria examines relationships with employees, customers and suppliers, while governance mostly measures a company’s leadership and its shareholders’ rights. According to S&P Global, United Airlines has an ESG score of 38/100.
INDUSTRY OUTLOOK
In this section, we will try to summarize key points that made us feel confident about investing in the airline industry. It’s known that COVID’s travel restrictions in recent years roughly hit air travel demand, however, what we see now is a ‘recovery phase’ for the whole industry. We want to share the numbers to be more clear. According to the International Civil Aviation Organization (ICAO), international passenger traffic decreased by 60% in 2020 and 2021 compared to 2019. However, in 2022 we saw some recovery, and air traffic reached 68.5% of pre-pandemic levels. The momentum continued in 2023, with a 37% increase compared to 2022. By the end of 2023, international passenger traffic had reached 94% of its 2019 numbers and is expected to reach those levels in 2024 according to International Air Transport Association (IATA). Of course, lower demand for air travel means lower profitability for the firms, and the airline industry showed industrial net loss in 2020, 2021 and 2022 but is expected to reach $25.7 billion net profit by the end of 2024. Another promising data that shows us evidence of further growth is the market research conducted by Polaris. Polaris forecasts the industry to grow at a compound annual growth rate (CAGR) of 3.53% in 2023-2032, which would mean that the airline industry will be valued at more than $473 billion in 2032. Moreover, a different positive catalyst for us is the potential implications of generative AI. Airlines could optimize flight routes and schedules using historical data, decrease fuel consumption, and improve customer experience. Since these would lower the labor cost and maybe even fuel consumption, we expect it to further improve profit margins and operations within companies. Signs of air traffic recovery momentum and expectations about further future growth made us maintain a positive outlook about the industry.
COMPARATIVE ANALYSIS
Once we decided we had a positive outlook for the industry, we wanted to further investigate how United Airline’s metrics are looking relative to its top competitors.
1-)Price To Earnings Ratio (P/E)
United Airlines (UAL): 5.1
Southwest Airlines (LUV): 21.98
American Airlines (AAL): 5.67
Alaska Airlines (ALK): 9.23
Delta Air Lines (DAL): 7.83
With United Airlines having the lowest P/E ratio, we can assess that it is undervalued compared to its peers.
2-)Revenue Growth (YoY-Year over year)
United Airlines (UAL): 12.31%
Southwest Airlines (LUV): 7.6%
American Airlines (AAL): 1.74%
Alaska Airlines (ALK): 2.96%
Delta Air Lines (DAL): 9.34%
3-)EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) Margin:
United Airlines (UAL): 14.56%
Southwest Airlines (LUV): 7.82%
American Airlines (AAL): 11.14%
Alaska Airlines (ALK): 11.98%
Delta Air Lines (DAL): 13.86%
The EBITDA margin provides information about a company’s operating profitability by measuring its earnings before non-operating expenses such as interest, taxes, depreciation, and amortization. We believe it helps to do a clear comparison of operating performance between companies since it is excluding non-operational factors.
It can be observed from the data above that United Airlines has an impressive position when looking at Valuation, Growth, and Profitability metrics.
SWOT ANALYSIS
Strengths:
- Third largest airline, according to Forbes, United Airlines Holdings is the third largest public airline company by revenue as of January 2023, behind American Airlines and Delta Air Lines.
- Extensive route network and hub system, United has a wide range of domestic and international destinations, with hubs in key cities such as New York, Washington, London, Frankfurt, São Paulo and Tokyo. This global presence is desired by passengers that can benefit from this connectivity and reach places very distant from one another in just one route.
- Strong financial performance, since 2006, the company has grown its EBIT on a CAGR of 14.09% and its operating revenue by 5.52%.
- Star Alliance membership, UAL is a founding member of the Star Alliance, which is the world’s largest airline alliance that improves the company’s service offerings by giving them extended global reach, shared resources and codeshare agreements.
- Diverse fleet, United Airlines has a diverse fleet of aircrafts that includes a variety of Boeings, Airbus and, for regional routes, smaller planes such as the Bombardier CRJs.
- Cargo operations, the company also offers cargo services, which diversifies the stream of revenue from its traditional one of people transportation.
- Investments in customer experience, the company is constantly investing to improve its customers experience, and in fact recently the company has announced that it will be the first one to add larger overhead bins on its planes. This will be added on 50 Embraer E175 aircrafts by the end of this year, and they will fit 29 more bags per flight in order to make room for everyone’s carry-on. In 2026, these bins will be installed in more than 150 planes.
- Operational efficiency, United focuses on operational efficiency to boost both its competitiveness and financial performance with route management and fleet utilization.
- Sustainability initiatives, United Airlines is committed to sustainability, with initiatives to reduce its carbon footprints.
- Underpriced from our calculations, the company has an EV/EBIT ratio of 5.67, meaning that is underpriced and can benefit from our calculations based on the company’s value of this ratio in the past, a +15% performance. If we were to not consider the 2 years of pandemic, then there would be a potential 48% upside. From the comparative analysis, it can also be seen that UAL has a low P/E ratio compared to its competitors despite having better growth and profitability margins. In addition to this, by using as a source data find on Yahoo Finance, we applied the Peter Lynch formula to see if the company is underpriced. This formula takes in consideration the 5-years EPS growth (%) + the dividend yield (%) and it divides this result by the company’s P/E. If the result is less than 1, then the company is overvalued, if it is close to 1 or 1.5, the company is fairly valued and if it is close to 2 or more than 2 then the company is undervalued. By our calculations with the Yahoo Finance analysts opinion on the future EPS growth, the company had a result of 6.71.
Weaknesses:
- Dependent on economic cycles, the airline industry is highly sensitive to economic downturns, as was the case during COVID that severely impacted United’s revenue and profitability.
- Dependent on suppliers, a large part of their fleet is composed of Boeings, that in the last period have had lots of safety accidents.
- Fuel price volatility, this factor can highly impact United costs and financial stability.
- United has faced criticism in the past for its poor customer service, and such events can affect customer loyalty and damage its reputation.
- Insider purchases, the last insider purchases were performed by two Non-Executive Directors in March and November 2023, and after the good performance on the quarterly earnings, an Officer took some profit selling a part of his stake (source insiderscreener.com).
- Short interest, the company has in our opinion a border line short interest of 5.44%, which means that these investors are betting against the company’s performance.
Opportunities:
- Expansion of the route network, expanding in new markets and especially in emerging economies with growing demand for air travel can provide extra revenue opportunities.
- Fleet modernisation, by modernizing the current fleet, UAL could make an investment to reduce operational costs and its environmental sustainability by consuming less fuel.
- Cargo services expansion, in order to be less dependent from the passenger transportation business, United could catch the opportunity to expand its cargo operations thanks to the rise of e-commerce and global trade.
- Technology and innovation, the company should embrace emerging technologies such as AI to improve customer services and reduce costs.
Threats:
- Economic downturns, recessions can lead to reduced travel demand because of a reduction of the purchasing power of people.
- Health crises and pandemics, the COVID period severely damaged the company’s financial performances since its revenue was highly impacted by the impossibility to travel.
- Intense competition, the airline industry has a high level of competition with a vast number of players and low-cost carriers, that can reduce the prices and force United to adapt with a consequent profit margins reduction.
- Environmental regulations, stricter environmental regulations to reduce carbon emissions can increase operational costs.
- Terrorism and security concerns, acts of terrorism could lead to a higher level of security required, which would increase operational costs, and reduce the number of passengers because they might be scared of traveling.
WHY DID WE BUY UAL?
Based on the information provided and our research, we decided to give a buy target to United Airlines Holdings and bought it at $41.78 the 12th of April, and we are planning to buy more in the near future. In this final part of the article, we will summarize what we said previously and add additional information and data to motivate our choice.
During the pandemic, the airline industry took a massive hit, with revenues that tanked since it was not possible to travel. At the moment of our analysis where we evaluated if it was a stock to buy or not (09/04/2024), UAL was down 48% on its share price from April 2019, but it was showing a positive trend in 2024. As said before, we bought United the 12th of April taking a bet since the company was to announce its quarterly results on the 16th, and fortunately they were better-than-expected. EBIT was continuing its growth in 2023 that was stopped by the pandemic in 2020 and 2021, and as said before the EV/EBIT, which compares the enterprise value to EBIT, is at 5.67 and shows that the company is heavily undervalued. The company has in addition a low P/E compared to its competitors and, by using the Peter Lynch’s formula, it is confirmed that is highly undervalued. Another important factor is that the company is now financially stable because net debt is just 3 times EBIT and, in our opinion, the situation is under control because net debt is not more than 5 times the EBIT. With a 14% CAGR on EBIT in the last 10 years, the company is growing really fast and has also a good CAGR on revenue that is around 5%. A factor that should boost revenue and margins is the installation of larger bins that will improve client comfort and operating efficiency. The major threats in our opinion that can be noted and that could justify the discounted price at which UAL is trading are:
- The possibility of an increase in safety regulations by the FAA that could prevent the company from opening more flight destinations and expanding,
- The high dependance of UAL from Boeing planes that are recently having safety issues with several accidents happening mid air.
Though, we do not believe that these reasons could impact the company’s performance, especially in the long-term and we remain of our opinion that the company is a buy.
Authors: Filippo Ferrero and Kaan Pinar
THIS IS NOT FINANCIAL ADVICE