United Airlines Holdings (UAL - Free Report) , alike its peers American Airlines (AAL - Free Report) , Delta Air Lines (DAL - Free Report) and Southwest Airlines (LUV - Free Report) , is under significant pressure from the decline in air travel demand following the coronavirus outbreak. However, there are certain positives that support its long-term growth potential.
With fuel expenses comprising a major chunk of airline expenditures, low fuel prices are a boon to the carrier. Over the past few months, crude oil prices have been trending at a very low level. The significant savings on fuel costs (down 7.3% in first-quarter 2020) should drive the bottom line and minimize losses resulting from the drop in demand.
The company’s strong performance in 2019 despite headwinds such as prolonged MAX groundings, government shutdown and poor weather conditions is worth noting. Notwithstanding these obstacles, United Airlines achieved its 2020 adjusted earnings per share target of $11-$13 in 2019 itself.
Additionally, the carrier’s cost-controlling measures like freezing hiring (except for crucial roles), delaying salary increases as well as giving employees the option to apply for unpaid leave of absence voluntarily, should help in preserving a substantial amount of cash to combat the coronavirus-led downturn. Notably, the carrier reduced its adjusted capex guidance for 2020 by $2.5 billion in view of the coronavirus crisis. For the current year, capital expenditures are expected to be below $4.5 billion.
Further, the fact that the carrier is keeping up with its fleet modernization efforts despite the massive downturn in its business is encouraging. In this regard, the carrier is replacing outdated planes with new ones. The recent deal with Bank of China Aviation to sell 22 planes is a positive in this respect. The pact covers a fleet of six Boeing 787-9 and 16 Boeing 737-9 MAX planes. However, the planes can be leased back to the carrier under long-term agreements. The deal is expected to close later this year. These fleet upgradation efforts should boost operational efficiency.
In light of these positives, we believe investors should hold on to the United Airlines stock for now, as is suggested by its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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