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United Airlines' Recovery Trajectory Fails to Impress

By Adam Levine-Weinberg - Apr 21, 2021 at 9:50AM

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With short-haul leisure travel leading the recovery, United's traditional reliance on business travel and long-haul international routes will drag down its near-term performance.

Over the past year, United Airlines (UAL 2.88%) has been near the top of the U.S. airline industry in terms of limiting its cash burn. Considering its heavy exposure to hard-hit long-haul travel, United's cash burn performance was impressive.

Cash burn continued to improve last quarter. Moreover, United reported that "core" cash flow turned positive in the month of March, driven by pent-up leisure travel demand. Nevertheless, with short-haul leisure travel driving the post-pandemic rebound, United Airlines is poised to fall behind top rival Delta Air Lines (DAL 1.90%) during the next stage of the recovery.

Decent progress last quarter

United Airlines' revenue fell 60% year over year in the first quarter of 2021. Despite aggressive cost cuts, United posted an adjusted pre-tax loss of $3.1 billion and an adjusted net loss of $2.4 billion.

A United Airlines plane on the ground

Image source: United Airlines.

These results were slightly worse than the airline's fourth-quarter results. That matches the typical seasonality of the airline industry. Delta suffered a much bigger sequential increase in its pre-tax loss, making United's result look good by comparison.

United also reported that core cash burn narrowed to $9 million per day last quarter from $19 million a quarter earlier. Core cash burn even turned positive in the month of March. That said, it's important to note that this non-standard metric may make United's cash flow look stronger than it really is.

Q2 guidance leaves something to be desired

Like peers, United Airlines will benefit from improving travel demand in the second quarter. However, its reliance on long-haul international travel and business travel -- even compared to full-service airline rivals Delta Air Lines and American Airlines -- may start to weigh on its relative performance.

Management currently projects that unit revenue will be down about 20% from the second quarter of 2019 on 45% less capacity. This implies that total revenue will come in right around $5 billion: down 56% from two years earlier.

Furthermore, United expects its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin to be approximately -20% this quarter. That implies an adjusted EBITDA loss of $1 billion and an adjusted pre-tax loss of around $2 billion. For comparison, Delta's management recently projected that the carrier's adjusted pre-tax loss will narrow to between $1 billion and $1.5 billion this quarter.

A Delta Air Lines plane landing on a runway

Delta expects a much smaller loss than United this quarter. Image source: Delta Air Lines.

Obviously, United could beat its guidance -- or Delta could miss its forecast. However, United has a suboptimal hub structure and fleet for the current demand environment, which is heavily weighted toward short-haul leisure travel. Thus, it wouldn't be surprising if the airline's disappointing Q2 forecast turns out to be roughly accurate.

Do you believe in management's long-term optimism?

United's management expects demand to continue recovering over the next few quarters, but the airline isn't making big promises about its near-term performance. By contrast, United Airlines executives are extremely bullish about the company's long-term prospects. They expect the carrier's adjusted EBITDA margin to surpass its 2019 level by 2023, with further growth beyond then.

An optimistic view of long-term business travel demand underpins this outlook. Most airlines are preparing for the possibility that growing comfort with videoconferencing tools will keep business travel demand below 2019 levels permanently. Meanwhile, United expects a full recovery in business travel by the summer of 2023.

During United's earnings call, CEO Scott Kirby provided some anecdotal evidence to support this view. He noted that the CEO of one major corporate customer expects to increase business travel to beyond 2019 levels in the near term in order to reconnect with customers and rebuild the company culture.

Pessimists' predictions about massive long-term reductions in business travel are probably overblown. Nevertheless, Kirby's belief that there will be no long-term impact on business travel seems like wishful thinking. (For comparison, Delta CEO Ed Bastian has estimated that business travel demand could permanently be 10% to 20% lower than it was before the pandemic.)

Without a full recovery in business travel, United will remain at a relative disadvantage within the airline industry. Investors should probably wait for proof that United's aggressive long-term profit forecasts are achievable before betting big on this struggling airline.

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Stocks Mentioned

United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
UAL
$36.44 (2.88%) $1.02
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$29.52 (1.90%) $0.55

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