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United Airlines (UAL) Q2 2019 Earnings Preview

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United Airlines (UAL - Free Report) stock currently sits down 6.4% from its 52-week high, although has climbed 18.3% since the beginning of June. With Q2 2019 earnings season unofficially beginning this week, let’s see what investors might expect from United’s earnings report.

Looking Back

One of the best ways to predict what an earnings report may hold is to look at a company’s recent financial history. United’s is attractive, improving in many key areas to boost earnings numbers and keep shareholders happy.

United’s stock is up 9.7% YTD, underperforming the S&P 500, but outperforming its peer group. It also holds a forward P/E of 7.74x, noticeably cheaper than the Air Transportation industry average of 10.35x.

Last quarter, UAL reported a 1.8% increase in pre-tax margins, the second consecutive quarter with a margin increase. This is especially impressive due to the highly competitive nature of the airline industry and its large cost of goods sold. United also reported a 6.2% total operating revenue increase over Q1 2018. More importantly, last quarter saw a 113.7% EPS increase to $1.09 per share. This substantial increase came in spite of harsh weather and flight cancellations due to the Boeing (BA - Free Report) 737 MAX groundings.

Overview

United is in a good position with respect to these groundings, especially compared to other major U.S. carriers. United has only 14 MAX jets, while American Airlines (AAL - Free Report) and Southwest Airlines (LUV - Free Report) claim 24 and 34 MAX jets, respectively. Delta (DAL - Free Report) has no 737 MAX jets.

On Friday, United announced that it would extend the grounding of the 737 MAX through Nov. 3, which amounts to 2,100 canceled flights in September and 2,900 in October. Previously, the planes were removed from United’s schedule through Aug. 3rd, but this has been extended due to delays in Boeing’s fix. The plane is predicted to be approved by the FAA to return to service late this fall.

Meanwhile, United is currently negotiating behind closed doors with Chase Bank (JPM - Free Report) for a new partnership structure for its mileage-rewards credit card. Ancillary sources, such as bag fees and loyalty programs, account for about 11% of global airline revenue. The goal of this renegotiation is to give UAL better economics for the program and help bring it to the level of profitability that other airlines get from mileage-rewards cards. The potential benefits of any successful United renegotiation have not been included in 2019 or 2020 projections, which means this could be a backbone for earnings increases in the future as the card program is currently under-performing relative to the rest of the industry. 

Despite all of the positives, rising tensions in the Middle East could throw a wrench in airline margins. If oil supply lines are further threatened, jet fuel prices may continue to rise and dig into profits.

Q2 Outlook

United’s revenue is projected to grow 5.57% over Q2 2018 to $11.38 billion, based on our current Zacks Consensus Estimate. This would mark United’s highest gross revenue quarter ever, which is predicted to be part of a 4.91% total revenue increase for United in 2019.

UAL’s expected revenue growth, along with increased pre-tax margins, are projected to help lift Q2’s EPS by 26% to $4.07. This is projected to be UAL’s best EPS quarter since 2015. This estimate has stayed consistent over the past 90 days, speaking to the stability of United and air travel revenues in general. Our full-year 2019 EPS prediction currently calls for 22.7% growth to see it hit $11.20 per share, a 1.6% jump from three months ago.

Overall, United seems to be producing stable sales and margins growth, resulting in solid EPS. With initiatives in place to continue to spur growth, the future of UAL looks promising. Overall airline passenger demand has slowed over the past two years, but is currently at a strong 5%.

UAL reports its Q2 2019 earnings after the market closes on Tuesday. Look for continued growth this quarter, but check if guidance has been adjusted on possible margins pressures.

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