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Here's Why United Airlines (UAL) Can Grace Your Portfolio

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United Airlines’ (UAL - Free Report) strong air travel demand, buoyed by the introduction of new routes and fleet expansion, provides significant momentum. Nevertheless, UAL faces substantial challenges from high fuel and labor costs, which act as significant obstacles to its success.

Factors Favoring UAL

United Airlines saw a notable 19.5% year-over-year revenue surge in 2023, fueled primarily by a 22.5% increase in passenger revenues, which comprised 92% of the total revenues.

UAL marked a significant step in its journey toward net-zero emissions by 2050, flying the first commercial flight powered by 100% sustainable aviation fuel (SAF) in December 2021. Supplied by World Energy, this SAF flight operated from Chicago to Washington, D.C. In June 2022, United Airlines and its venture firm, United Airlines Ventures, invested in and partnered with Dimensional Energy to further their commitment to green initiatives, advancing their goal of achieving 100% net-zero emissions by 2050 without relying on carbon offsets.

UAL’s efforts to modernize its fleet are also commendable.  The company expanded its code-sharing with Azul, offering access to six new destinations for passengers connecting from select Brazilian airports to Orlando or Fort Lauderdale on UAL flights. The new routes include Chicago, Cleveland, Denver, San Francisco, Washington DC and Los Angeles. This allows travelers to book a single ticket for both airlines, enhancing convenience.

Key Risks

Rising fuel costs do not bode well for the airline, adversely affecting its bottom line. Despite a decrease from the highs seen in the third quarter of 2023, oil prices remain elevated.

Labor expenses are also adversely impacting UAL's bottom line, with operating costs rising by 16.2% in 2023 despite a decrease in aircraft fuel costs. Salaries and related expenses increased by 19.4% during the same period. Non-fuel unit costs for the March quarter are anticipated to rise by mid-single digits compared to the first-quarter 2023 levels due to high labor costs and low capacity. UAL expects to incur a loss in the first quarter of 2024, estimated between 35 and 85 cents per share, mainly due to high costs.

In 2024, UAL plans to take delivery of 107 jets, resulting in an adjusted capex of $9 billion, which exceeds the 2023 actual of $7.2 billion. Such high capex may pose challenges for the airline.

Zacks Rank

UAL currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks for investors’ consideration from the Zacks Transportation sector include GATX Corporation (GATX - Free Report) and Skywest (SKYW - Free Report) . Each stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GATX has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in three of the last four quarters (missing the mark in the remaining one). The average beat is 16.47%.

The Zacks Consensus Estimate for 2024 earnings has been revised 9% upward over the past 90 days. The company has an expected earnings growth rate of 6.5% for 2024. Shares of GATX have rallied 26% in the past year.

SkyWest's fleet modernization efforts are commendable. The Zacks Consensus Estimate for SKYW’s 2024 earnings has improved 26% over the past 90 days. Shares of SkyWesthave surged 262% in the past year.

SKYW has an expected earnings growth rate of more than 100% for 2024. The company delivered a trailing four-quarter earnings surprise of 128.02%, on average.

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