Has the United Continental Turnaround Finally Arrived?

United Continental has struggled mightily for the last two years. Has a ray of hope finally appeared?

Jan 10, 2014 at 8:59AM

For much of the last two years, United Continental (NYSE:UAL) has been the "Brooklyn Dodgers of the airline industry." It would enter each year with lofty expectations, but eventually stumble and dash investors' hopes, only to promise better times ahead. While most airlines have seen significant margin expansion since 2011, United's profit margin has contracted to the low single digits since then.

United Plane

After two years of underperformance, is United finally bouncing back? Photo: United Continental.

However, United may finally be ready to break out from its long streak of underperformance. Uncharacteristically, after providing a glum Q4 outlook back in October, United managed to smash its revenue guidance for the quarter. While I am still skeptical of United's competitive position due to its high cost structure, the company is finally making a case that it can catch up to competitors over time.

The guidance
In October, United shocked the market when it told investors that unit revenue was likely to decline 0%-2% in the fourth quarter. The company blamed this expected decline on several factors, including dampened demand caused by the government shutdown, a poorly calibrated revenue management system, and increased competition on routes to China.

However, this forecast quickly began to look overly pessimistic. In early November, United disclosed that October unit revenue was flat -- significantly better than the original forecast -- due to "larger than normal positive adjustments identified during the month-end close process."

Like most other U.S. airlines, United experienced a modest decline in unit revenue for November due to the calendar shift of Thanksgiving toward the end of the month. That pushed most of the lucrative Thanksgiving return traffic into December. Sure enough, United announced this week that unit revenue soared by about 12% last month. Once again, the company highlighted higher than normal positive adjustments from the "month-end close" as a factor boosting unit revenue.

The net result of United's better than expected performance is that unit revenue is now projected to rise 2.8%-3.8% for Q4 2013. At the midpoint, that would represent an improvement of better than four percentage points over the original guidance. It would be hard to overstate the significance of this guidance beat; nearly all of that incremental revenue will drop to the bottom line. This should allow United to crush analysts' Q4 earnings estimates, which have been hovering around breakeven recently.

What's the long-term story?
United's Q4 performance looks very solid, to be sure. However, we at the Fool recommend that investors take the long-term view; it's the best way to build wealth. So what does United's Q4 revenue performance mean for its long-term prospects?

This is where the story becomes more muddled. In two separate months during Q4, United pointed out big positive adjustments related to interline tickets that boosted unit revenue. It's not clear whether investors can rely on these positive adjustments going forward or if they were "one-time" in nature.

On the flip side, competition for flying to Asia is just going to get more and more brutal for the foreseeable future, as the top carriers jockey for position. For example, Delta Air Lines (NYSE:DAL) is building a trans-pacific gateway in Seattle that is starting to compete with United's San Francisco hub. Delta began flights to Shanghai last summer, and in June it will begin service to Seoul and Hong Kong.


Delta is stepping up the competition on routes to Asia with its new Seattle international gateway.

Meanwhile, Cathay Pacific is starting service between Newark and Hong Kong in March, giving United its first direct competition on that route. Cathay Pacific also plans to boost service on its Chicago-Hong Kong route this summer, again in direct competition with United.

More broadly, United has the highest cost structure in the airline industry today. Despite efforts to offset cost growth, it will be hard for United to do more than keep pace with top competitors Delta and American Airlines (NASDAQ:AAL), which are also actively pursuing cost-cutting opportunities. This means that, unless United can sustain an even bigger revenue premium than it does today, it will have to accept permanently lower margins.

Foolish takeaway
United Continental appears well positioned for solid margin expansion in 2014, barring a spike in oil prices. However, for me to become comfortable with United as an investment, I would need to see to see the company consistently reduce the margin gap vis-a-vis Delta and American over the course of several quarters (at a minimum).

Based on United's new guidance, it looks like the carrier gained some ground on the airline industry in Q4 in terms of profit margins. Now, United just needs to repeat that performance a few more times, and it will finally be in decent shape.

The key to lower oil prices
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling "OPEC's Worst Nightmare." Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers