Three months ago, United Airlines (NASDAQ:UAL) told investors that it would return to profitability in the third quarter, excluding special items like government payroll support grants. In early September, the company had to walk back that forecast, as the rapid spread of the delta variant in the U.S. caused demand to stall.
On Tuesday afternoon, United reported its third-quarter results. While the company recorded a substantial loss, management claims that the recovery has resumed, putting the full-service airline on track for a meaningful rebound in 2022. Let's take a look.
Another step forward
United Airlines generated $7.75 billion of revenue last quarter, down 31.9% from the third quarter of 2019. The airline's 28.2% capacity reduction drove most of that decline. Unit revenue fell just 5.1% relative to Q3 2019, which wasn't such a bad result at this early stage of the recovery. That said, United had initially projected that unit revenue would actually eclipse pre-pandemic levels.
Meanwhile, adjusted nonfuel unit costs rose 14.9% compared to two years ago, slightly better than United's initial guidance. The net result was an adjusted pre-tax loss of $473 million -- putting the company's adjusted pre-tax margin at -6.1% -- and an adjusted net loss of $329 million ($1.02 per share). This beat the recent analyst consensus for a loss of $1.67 per share, despite falling well short of management's July forecast.
Including the benefit from the final round of airline payroll support grants, United logged a net profit of $473 million ($1.44 per share).
Although United Airlines couldn't return to profitability on an adjusted basis, its third-quarter results still represented a big improvement compared to the first half of 2021. United reported adjusted net losses of $2.4 billion and $1.3 billion for the first quarter and second quarter, respectively.
Fuel costs will cut into Q4 profitability
For the fourth quarter, United Airlines expects revenue to decline 25% to 30% compared to Q4 2019 on a 23% capacity reduction. That implies another mid-single-digit unit revenue decline. Meanwhile, management expects nonfuel unit costs to rise 12% to 14%, which would be slightly better than its Q3 performance.
However, like key rival Delta Air Lines, United anticipates that soaring fuel costs will damage its profitability this quarter. The carrier projects that fuel costs will reach $2.39 per gallon, up from $2.10 per gallon two years earlier.
Based on these guideposts, it appears likely that United Airlines will record a pre-tax loss of roughly $1 billion this quarter.
Smooth sailing ahead?
Despite the company reporting a loss for the third quarter and projecting an even bigger loss for the fourth quarter, United Airlines executives remain extremely bullish about the airline's future. Management anticipates a strong recovery in demand for both leisure travel and business trips over the next two years. As a result, United plans to ramp up capacity beyond pre-pandemic levels next year, with rapid growth thereafter. That should help it steadily reduce unit costs over the next five years or so.
In fact, United Airlines estimated that a combination of solid revenue growth and declining unit costs will boost adjusted earnings per share to $20 by 2026, assuming no change in the company's share count. That implies 2026 net income of approximately $6.6 billion: more than double the $3 billion United earned in 2019.
United Airlines stock has traded below $50 for most of the past few months. That would make it an absolute steal if the company comes anywhere close to meeting this aggressive EPS target.
Investors shouldn't be lured into a false sense of security, though. United Airlines shares do have substantial upside if management's growth plan works out. But if the carrier's aggressive expansion undermines fares, the company could easily miss its 2026 forecast by 50% or more.
Moreover, United's growth plan calls for spending $4.2 billion on capital expenditures next year and boosting capex to an unprecedented $8.5 billion in 2023. That will prevent the airline from making a dent in its debt load -- which currently stands at $33.8 billion, or $41.3 billion including lease liabilities -- in the near term. As such, only highly risk-tolerant investors should consider United Airlines at this time.