United Airlines: Capacity Constraints Cloud Promising Outlook

BURLINGAME, CALIFORNIA - MARCH 13: A United Airlines Boeing 737 Max 9 aircraft lands at San Francisco International Airport on March 13, 2019 in Burlingame, California. The United States has followed countries around the world and has grounded all Boeing 737 Max aircraft following a crash of an Ethiopia Airlines 737 Max 8. (Photo by Justin Sullivan/Getty Images)

United Airlines, Inc. is the principal and fully-owned subsidiary of United Continental Holdings, Inc. (NASDAQ:UAL). The number four US carrier in terms of capacity competes against its legacy network peers Delta Air Lines Inc. (NYSE:DAL) and American Airlines Group Inc. (NASDAQ:AAL). Despite having the lowest unit cost figures among competitors, the operating margins of the Chicago-based company have lagged the industry average as its capacity expansion outweighed the revenue growth.

UAL’s recent focus on mid-con hubs and premium capacity expansion will lift its unit revenue, the current limiting factor to improve margins. UAL meanwhile further enhances its cost advantage through fleet transformation and initiatives to encourage direct bookings. However, the grounding of the Boeing-manufactured (NYSE:BA) 737 MAX aircraft, which makes up 14 planes of its fleet and 48% of its order book, has made the future outlook of the company murky. Though gradually narrowing, UAL’s forward PE continues to trade at a discount to that of DAL which has no impact from MAX grounding. Despite progressive initiatives to improve unit revenue, the constraints on UAL’s future capacity expansion plans justify the continuation of the discount as 737 MAX suspension drags on.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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