Last week, United Airlines (UAL 5.52%) reported fourth-quarter results at the better end of its guidance range, despite the negative impact of the omicron variant on air travel demand. This achievement highlights the pent-up demand that could be unleashed later in 2022 if the COVID-19 pandemic starts to moderate.
However, the fact remains that United is still losing money. And even if demand does recover soon, there's no way to know how much that will boost profitability, considering the ultra-competitive nature of the airline industry. As a result, United Airlines stock is too risky to be worth buying, despite its turnaround potential.
Another quarterly loss
Six months ago, United Airlines executives confidently predicted that the company would return to consistent profitability in the second half of 2021. Even the early spread of the delta variant didn't faze management, which reported no impact on bookings as of July 21.
This confidence was misplaced. The delta variant eventually did cut into demand. More recently, the omicron variant has had a smaller but still significant negative impact on air travel.
As a result, United Airlines recorded a $473 million adjusted pre-tax loss in the third quarter of 2021. By the time it reported its Q3 results in October, the company also projected that revenue would fall 25% to 30% compared to 2019 in the fourth quarter, leading to another sizable quarterly loss.
Image source: United Airlines.
Ultimately, United Airlines reported fourth-quarter revenue of $8.19 billion: down 25% from Q4 2019. That met the high end of management's guidance, despite a roughly 2-percentage-point headwind from the omicron variant. Still, United's adjusted pre-tax loss increased sequentially to $679 million, leaving the airline well short of its goal of returning to profitability.
The recovery is delayed again
Like key rival American Airlines, United is set to record an even bigger loss this quarter. Management expects revenue to decline 20% to 25% relative to the first quarter of 2019 on 16% to 18% less capacity. Meanwhile, adjusted non-fuel unit costs are on track to jump 14% to 15% versus Q1 2019 and fuel costs could rise to $2.51 per gallon.
The midpoint of United Airlines' guidance implies a first-quarter adjusted pre-tax loss of roughly $1.5 billion. Even if the company's revenue forecast proves conservative again, United seems likely to lose over $1 billion before tax this quarter.
Management does anticipate that results will improve dramatically as 2022 progresses and highlighted strong early bookings for the spring and summer. It's quite plausible that United will finally return to sustainable profitability in the second quarter. However, the delay in getting there will have cost the company billions of dollars of lost earnings compared to what management had expected just six months ago.
Aggressive growth plan creates too many risks
Last June, United Airlines unveiled an ambitious plan to grow its revenue and profitability over the next five years. In pursuit of these goals, the airline will dramatically ramp up capital expenditures.
Image source: United Airlines.
Management projects that capex will total $5.9 billion this year, including spending that shifted from 2021 to 2022 because of delayed aircraft deliveries. Capex is set to peak at a stunning $8.5 billion in 2023 before moderating to perhaps $6 billion in 2024.
When it unveiled its plan last year, United claimed that it would generate enough cash from operations to cover all of this capital spending. That target seemed like a stretch at the time. Now, it seems extremely far-fetched, considering how much the company's financial results have lagged expectations since last summer.
This means that United's already-high debt load is going to rise even further over the next few years. If CEO Scott Kirby's long-term strategic plan works out, boosting the company's pre-tax margin to record levels within a few years, United Airlines will have plenty of time to repay this debt later in the decade. In that scenario, shareholders would reap handsome rewards.
However, United's earnings targets could also prove thoroughly unrealistic. In that case, the upcoming spending spree would saddle the company with a crushing debt load for many years to come. The risk of ramping up capex so aggressively while starting with a weak balance sheet makes United Airlines stock a bad bet for prudent investors in 2022.
