In recent weeks, United Airlines (UAL) has faced a series of challenges that have kept its shareholders on a rollercoaster ride. The troubles began with the Alaska Air (ALK) incident on January 8, where a door plug blew out at 16,000 feet, leading to the Federal Aviation Administration (FAA) grounding all Boeing (BA) 737-9 MAX jets. This event sent UAL shares plummeting by approximately 10%. However, the airline industry is known for its resilience, and United Airlines proved this once again with its Q4 earnings release.
Preparing for a Rough Report
As UAL headed into its Q4 earnings release, market participants were preparing for a potentially rough report. The indefinite grounding of 79 MAX-9 jets, coupled with a cooling demand for domestic travel amid macroeconomic uncertainties, had investors cautious. However, the airline managed to surprise both investors and analysts by surpassing Q4 earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... (EPS) and revenue expectations.
Challenging Q3 Guidance
To understand the significance of UAL’s Q4 performance, we must first look back to its Q3 results reported in mid-October. During that announcement, the company issued a bleak Q4 EPS guidance range of $1.50 to $1.80. This guidance fell far short of expectations and was attributed to higher fuel and labor costs, along with flight suspensions into Israel due to escalating conflicts in the region.
Interestingly, UAL’s fuel costs came in slightly lower than anticipated at $3.13 per gallon, compared to its guidance of $3.28 per gallon. Moreover, the airline continued to witness strong demand, especially for international travel, where passenger revenue surged by an impressive 18%, in contrast to a 7% growth in the domestic sector.
International Strength and Business Travel
United Airlines, much like its competitor Delta Airlines (DAL), benefited from the strength in international travel. The healthy demand for premium seats and a resurgence in business travel contributed to UAL’s robust revenue performance. The premium cabin segment saw its revenue increase by a remarkable 16%. CEO Scott Kirby even noted that business travel had rebounded to 2019 levels, signaling a promising trend.
Surprising Upside and Guidance
However, what truly surprised investors was UAL’s FY24 EPS guidance, which ranged from $9.00 to $11.00. This guidance exceeded estimates, particularly at the midpoint of the range. It alleviated concerns that Boeing’s ongoing manufacturing issues and the FAA’s grounding of the MAX-9 aircraft would negatively impact UAL’s results throughout the year.
Nevertheless, it’s important to acknowledge that UAL anticipates facing some challenges in Q1. The airline forecasts a three-point headwind to seat miles due to MAX-9 issues. Additionally, rising maintenance and labor costs continue to affect the bottom line. For Q1, UAL estimates that CASM-ex (Cost per Available Seat Mile, excluding fuel and certain items) will rise in the mid-single digits, following a 4.9% increase in Q4. Consequently, the company guided Q1 EPS well below expectations, ranging from ($0.85) to ($0.35).
The Takeaway: Navigating Turbulence
In summary, United Airlines may encounter some turbulence in Q1 as the MAX-9 aircraft remains grounded. However, this was already anticipated by investors, making the company’s FY24 guidance the focal point of interest. UAL’s ability to surpass muted expectations provided a significant boost to the stock, demonstrating the resilience and adaptability of the airline industry in the face of challenges.
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