United Airlines (NASDAQ:UAL) reported its second-quarter results on Tuesday afternoon. As expected, the company recorded a hefty loss for the quarter. However, like most other U.S. airlines, United outperformed its original forecast in the second quarter, as air travel demand began to rebound in earnest. Additionally, the full-service airline projected that it will generate positive adjusted pre-tax income in each of the next two quarters.
A small step forward
Back in April, United Airlines released its initial guidance for the second quarter. Its outlook implied quarterly revenue of approximately $5 billion, along with adjusted EBITDA of -$1 billion and an adjusted pre-tax loss of $2 billion.
In late May, United raised its guidance significantly, pointing to a sharp improvement in domestic leisure demand. Sure enough, Q2 revenue reached $5.47 billion, enabling the airline to limit its EBITDA loss to $585 million. For the month of June, adjusted EBITDA turned positive, reaching $212 million. United noted that a faster-than-expected recovery in business travel and long-haul international travel contributed to the strong sequential improvement.
Even so, United Airlines posted a quarterly adjusted pre-tax loss of $1.6 billion, better than its initial forecast but quite substantial by any objective standard. Under generally accepted accounting principles (GAAP), United recorded a much smaller pre-tax loss of $564 million. However, that included a $1.1 billion benefit from government payroll support grants, which are set to expire at the end of September.
Management calls for momentum to continue
While United's second-quarter results beat the company's initial guidance for the quarter and the analyst consensus, the airline's outlook for the rest of 2021 was far more impressive.
For the third quarter, United Airlines expects unit revenue to increase compared to the same period of 2019. A mix shift toward shorter flights is helping to boost unit revenue -- while also driving up unit costs -- but returning to unit revenue growth would be an impressive accomplishment regardless.
Furthermore, despite rising fuel prices and the expected increase in nonfuel unit costs, United projects that it will record its first adjusted pre-tax profit since 2019 this quarter. Interestingly, the company added that it expects to post another adjusted pre-tax profit in the fourth quarter. Analysts had been expecting United to continue losing money until the second quarter of 2022.
Can United follow through?
Unlike some of its rivals, United Airlines has taken a fairly cautious view of demand throughout the pandemic. That track record of conservatism lends some credence to its forecasts. And if the carrier can turn profits in each of the next two quarters without the help of payroll support grants, it would bode well for United's longer-term earnings goals.
That said, while the current summer travel boom seems likely to lift numerous airlines to profitability this quarter, United's Q4 guidance is a bit of a head-scratcher. Perhaps the recovery will continue at its recent pace or even accelerate. However, it's way too early to project that with any confidence. The spread of the highly-contagious Delta variant of the novel coronavirus could put a damper on the recovery before the fourth quarter even begins.
A pandemic setback would hurt United Airlines more than most airlines, due to the carrier's traditional focus on business travel and long-haul international travel. Major companies like Apple are already rethinking plans to reopen their offices in September. Until offices reopen, business travel will remain severely limited. Meanwhile, the Delta variant's spread could deal a setback to the long-haul travel recovery if countries institute new cross-border travel restrictions.
In short, last quarter's accelerating recovery may have made United's management overconfident about the future. Indeed, the airline has committed to a hugely ambitious and expensive growth plan for the next five years despite exiting the pandemic with an elevated debt load. Without more proof that business is recovering as expected, United Airlines stock looks overly risky relative to its potential upside.