Despite the recent decline in the share price of United Airlines (UAL 1.20%), the stock is still up 69% over the last year. However, there's more room to run, and even the latest news of a slowdown in bookings shouldn't shake long-term investors out of the stock.
Why United Airlines stock is volatile
First, it's worth acknowledging that United Airlines, like most airline stocks, is volatile and often traded on momentum. This is due to the delicate relationship between its margins and demand/supply conditions.
Airlines tend to have relatively high fixed costs, so they have pricing power when booking demand exceeds capacity, and revenue expands, leading to margin expansion. Unfortunately, the reverse is true, and all it takes is a slight downturn in demand to lead to margin pressure.
NASDAQ: UAL
Key Data Points
The latter is why investors have sold off the stock recently, as United Airlines and premium peer Delta Air Lines have both spoken of a recent weakening in demand. This may relate to cautiousness among consumers and corporations about the economy following the imposition of tariffs by Donald Trump, compounded by a drop in government bookings.
Why it's not too late to buy United Airlines stock
But sentiment can change as quickly as it fell away, as consumers and businesses adjust to the tariffs or the tariffs get removed or reduced. As for government bookings, United is already adjusting by preparing to replace government bookings with leisure bookings.
Image source: Getty Images.
Also, investors were worried about overcapacity last summer, and the airline industry's response was to reduce unnecessary capacity. United CEO Scott Kirby believes a similar outcome will occur this year if the current weakness is extended -- not least as airlines face pressures from airport costs and supply chain difficulties that are pressuring the profit of the low-cost carriers.
While there's potential for more near-term demand weakening, United Airlines is in a good position to be a winner when it ends, which could be sooner than many expect, and it's not too late to invest.
