United Airlines‘ (UAL – Free Report’s revenue is supported by strong demand for air travel. The company’s expansion efforts are commendable. However, increased operating costs and weak liquidity are affecting the company’s prospects.
Factors that favor UAL
The increasing demand for air travel bodes well for United Airlines, as the company reported robust revenue performance in the second quarter of 2024. During the quarter, United Airlines reported a 5.5% increase in passenger miles sold and an 8.3% increase in capacity, measured in available seat miles. The company expects this positive trend to continue in the future.
Management expects earnings per share for the third quarter to be in the range of $2.75 to $3.25. For the full year, UAL continues to expect earnings per share to be in the range of $9 to $11.
United Airlines’ expansion efforts are commendable. Demonstrating its commitment to improving connectivity and meeting growing travel demand, the airline announced nearly 200 new flights to Milwaukee and Chicago, resumed two daily flights from New York to Tel Aviv, and opened routes to Georgetown, Guyana.
Twelve additional domestic routes have been opened or resumed, connecting major cities in the United States and Canada. In addition, UAL has added seasonal flights between Porto, Brussels and Rome to New York and resumed service from Reykjavik to New York. This expansion not only benefits travelers, but also strengthens United Airlines’ position in the competitive air travel market.
UAL’s efforts to improve customer experience are also commendable. The United app is the most downloaded airline app, with 89% of customers using it digitally on travel days. The new seat preference feature benefited more than 30% of users in the second quarter, and 47% of passengers were able to rebook via automated or self-service options. Limited-edition Wrexham AFC-themed amenity kits and pajamas enhanced the travel experience on select long-haul flights.
Key risks
United Airlines’ bottom line is struggling with rising operating costs. In the second quarter of 2024, total operating expenses increased 3.1% year over year. This increase in operating costs was primarily due to labor and fuel costs.
Labor costs, consisting of salaries and benefits, account for 31.4% of total operating costs and increased 10.5% year-on-year. UAL’s Aviate Academy launched a pilot development program with Texas Southern University and awarded scholarships valued at over $200,000.
Jet fuel costs, which account for 24% of total operating costs, increased 11.1% year-over-year. The average fuel price per gallon increased 3.8% year-over-year to $2.76.
The company ended the second quarter of 2024 with a liquidity ratio (a measure of liquidity) of 0.77. A liquidity ratio of less than 1 indicates that the company is likely to have difficulty meeting its short-term obligations. Reduced pricing power is another concern.
UAL shares have fallen 28.1% over the past year, compared to the industry’s growth of 22.7% over the same period.
Image source: Zacks Investment Research
Zacks Rank
UAL currently has a Zacks Rank of 3 (Hold).
Stocks to be considered
Some better-rated stocks in the Zacks Transportation sector that investors should consider are CH Robinson worldwide (CHRW – Free report) and Kirby Corporation (KEX – Free report).
CH Robinson Worldwide currently has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. CHRW expects earnings growth of 27.4% for the current year.
The company has a history of impressive earnings surprises. Earnings have beaten the Zacks Consensus Estimate in three of the last four quarters and missed it once, for an average surprise of 7.3%. CHRW shares have risen 3.5% over the past year.
KEX currently has a Zacks Rank #2 (Buy) and is expected to post 40% earnings growth rate for the current year.
The company has an encouraging track record of earnings surprise, beating the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 8.7%. Kirby shares have gained 40.9% over the past year.
