How United Continental Holdings Inc Is Getting Love From Wall Street

United Continental Holdings Inc has received two upgrades from Wall Street in as many weeks.

Apr 2, 2014 at 6:38PM

Wall Street analysts are really warming up to legacy carrier United Continental Holdings Inc (NYSE:UAL). On Tuesday, the company received its second analyst upgrade in as many weeks as the research team at UBS (NYSE: UBS) put a buy rating on United.

Analysts' growing bullishness seems to be driven by the belief that competitive pressure is easing for United, which will allow the company to post better unit revenue results going forward. This may be true in the short-term, although even that is unclear.

However, in the long run, United is likely to face more competition -- not less. United is a big player in many of the top U.S. markets, and its high costs -- even compared to legacy peers Delta Air Lines (NYSE:DAL) and American Airlines (NASDAQ:AAL) -- make it an obvious target for up-and-coming rivals.

Lower competitive pressure?
Last week, analysts at Raymond James (NYSE: RJF) boosted their rating on United Continental to outperform. The analysts argued that, in addition to benefiting from improving industry demand trends, United will also see "easing competitive pressure in its hubs."

Images

Analysts are looking for United to post better unit revenue results starting this quarter

The UBS upgrade had a similar rationale. The analysts stated that data from their proprietary fare tracker and a study of competitors' capacity plans on United routes showed that unit revenue will accelerate in Q2.

There are definitely a few key markets where competitive pressure is easing. For example, United and Delta are both decreasing their Japan operations in response to the yen's devaluation. Delta recently ended its flight to Tokyo from United's San Francisco hub, while United dropped service to Tokyo from Delta's Seattle gateway. JetBlue Airways (NASDAQ:JBLU) is also dropping a few markets where it competes with United to free up capacity for its expansion at Washington's Reagan Airport.

The other side of the coin
Still, it's not like competitors are afraid of challenging United. On the lucrative transcontinental routes from New York to Los Angeles and San Francisco, American Airlines and JetBlue are stepping up their games in a big way. American and JetBlue are deploying brand new Airbus A321s on the routes, and both carriers are outfitting them with flat-bed premium cabins to match United, while running more frequencies.

Jetblue Premium Cabin

JetBlue is putting flat-bed seats on some transcontinental flights this year (Photo: JetBlue)

United's dominance in the Pacific region outside of Japan has also come under fire. Competitive capacity increases last year caused United's unit revenue in the Pacific region to drop. The trend of rapid capacity growth between the U.S. and Asia shows no signs of reversing.

Cathay Pacific began flying between Newark and Hong Kong last month, giving United its first competition on that route. Cathay also plans to boost service to Chicago and Los Angeles later this year. Air China will start competing with United on the Beijing-Washington route in a few months. Meanwhile, in June, Delta will launch nonstops from Seattle to Seoul and Hong Kong, while American will begin nonstops from Dallas/Fort Worth to Shanghai and Hong Kong.

More competition will come
To the extent that United is facing less competitive pressure this year than in previous years, it can thank Virgin America and Spirit Airlines (NASDAQ: SAVE). Both of these smaller carriers have been growing very rapidly, but they are taking a bit of a breather in 2014. However, it will be a brief respite.

G

Ultimately, Spirit's rapid growth could put pressure on the legacy carriers (Photo: Spirit Airlines)

Spirit plans to grow capacity by 16.7% this year (which is low for Spirit), but the company will make up for this by growing nearly 30% in 2015. Virgin America's growth came to a complete halt last year, but the company will start increasing its aircraft fleet again in the second half of 2015. Virgin America's two main bases (San Francisco and Los Angeles) are also United hubs, so Virgin's growth has a particularly strong impact on United.

United's high cost structure makes it a target for competitors. Last year, United's consolidated unit cost excluding fuel, special items, and third-party business expenses totaled $0.0966. At Delta, the comparable figure was $0.0950, and at American it was $0.0935.

While United is within a few percentage points of the other legacy carriers, that can be the difference between a profit and a loss in the notoriously low-margin airline business. United needs to charge higher fares to earn a solid profit, and this gives potential competitors an opportunity to undercut it on price.

Foolish final thoughts
Analysts are looking for unit revenue acceleration at United Continental this quarter. In a literal sense, this should be very easy: Because United is expected to report a unit revenue decline for Q1, even a return to breakeven would be "acceleration" in some sense.

Of course, United will do better than that. Even so, assuming United does post a unit revenue decline for Q1, the carrier will be hard-pressed just to match last year's 3.2% unit revenue gain for the full year. If United has anything going for it in 2014, it is cost containment, not accelerating unit revenue.

Thus, I'm still expecting United Continental to underperform the rest of the airline industry this year, just as it did last year. If United does manage to beat last year's 3.2% unit revenue growth in 2014, that would be a buy signal. However, right now, the bull case for United is based on hope more than facts.

OPEC is absolutely terrified of this game-changer
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