Prior to today, the
recent news flow coming out of the airline industry had been less than bullish,
stoking fears that the industry, as a whole, could be quickly losing altitude.
For instance, back on January 3, Delta Airlines (DAL 47.99, +0.15, +0.32%) lowered its Q4 total unit
revenue growth to 3% from the 3.5% guidance it offered in December, and down
from its original expectation of 3-5%. Then, on January 15, DAL issued downside
1Q19 EPS guidance ($0.70-$0.90 vs. $0.95 consensus) in its Q4 report while also
forecasting another slowdown in unit revenue growth (TRASM) to 0-2%.
Compounding the concerns for the airliner industry was that American Airlines (AAL 33.21, +1.11, +3.46%) also provided a downbeat outlook on January 11, saying that it expects total unit revenue growth of about 1.5%, at the low end of its +1.5-3.5% forecast. In its earnings press release, AAL commented that the revised outlook was due to a lower-than-anticipated improvement over a strong 4Q17.
However, with DAL similarly cutting its outlook, the evidence indicates that there is something more going on than lapping difficult comparables. Of course, the first inclination is to blame the government shutdown for the softer results. Indeed, during DAL's earnings call, management cited the shutdown as one of the culprits. More specifically, it stated that its Q1 unit growth outlook includes a 100 basis point impact from the shutdown, unfavorable foreign exchange impact, and some weakness in Europe. As we discuss in more detail below, the government shutdown could become a more meaningful factor should more un-paid TSA employees not report to work.
Another obvious factor is that a slowing global economy is starting to take a toll on the highly-cyclical airline industry. The deceleration in China is well-documented, as is the soft environment in Europe. Additionally, last quarter, United Airlines cited some weakness in the Latin America markets -- in particular, Argentina and Brazil.
Another concern regarding the industry is that lower fuel costs have amped up the competitive climate as carriers cut fares in a bid to bolster capacity. While fuel prices certainly play a major role in profit margins, the benefits of lower fuel can be at least partially offset by fare competition as airlines undercut each other on price.
United Airlines Flying Higher
So, there are clearly a few economic and industry related themes that are weighing on the industry right now. But, one major carrier has managed to withstand these headwinds better than the rest: United Continental (UAL 86.66, +5.46, +6.72%). After the close last night, UAL issued impressive Q4 results, comfortably exceeding analysts' estimates, with EPS coming in at $2.41 vs. the $2.02 consensus as revenue increased 11% to $10.49 bln.
Notably, unit revenue
growth was 5%, coming in at the high end of its 3-5% guidance range to out-pace
its primary competitors. Leading the way was a +6% jump in domestic PRASM. UAL stated during its earnings
call this morning that it will no longer provide monthly updates on data for
PRASM and its other operating metrics.
Naturally, the question is: How is UAL outperforming the industry?
First, it's interesting to note that
management offered some fairly bullish commentary on the economy and business
climate, somewhat in contrast to its peers. For example, it commented that the
first week in January is typically a good indicator of how businesses are
feeling about the economy and business conditions overall. That's because the
first week of January is its busiest corporate bookings week of the year as
employees return to work from the holiday season and companies set out their
travel budgets for the year ahead. On that note, business bookings grew by a
healthy 11% for this period, indicating that demand remains solid.
Furthermore, on the topic of the government shutdown, UAL said that it is monitoring the situation, but so far, it has had little impact on its business. However, uncertainly regarding the shutdown has led the company to provide a wider-than-normal guidance range for unit revenue. Specifically, it is projecting 1Q19 PRASM of +0-3%.
If the shutdown is not resolved in the coming weeks, it is difficult to see how it would not have some kind of impact. Already, the TSA has been reporting a higher-than-usual number of employees missing work, as employees have now missed their first paycheck. To put this into context, the TSA reported that agent call outs jumped to 7.6% of all agents for January 15, up from 3.2%. The longer the shutdown goes on, and the longer employees go un-paid, the higher the likelihood that more agents will not report to work. Consequently, travelers will have longer wait times. At Atlanta's Hartsfield-Jackson Airport, recent wait times were over an hour for domestic flights, with at least six TSA checkpoints shut down due to staffing shortages. While UAL doesn't seem overly concerned about the shutdown just yet, at some point, travelers may opt to suspend their travel plans, waiting for the shutdown to finally end.
Growth Plan & Cost Management Paying Dividends
To fully understand how UAL is outperforming the industry, we must examine how the company is excelling on the cost management side while also boosting its growth and market share by adding flights and new routes -- particularly out of its hub cities of Chicago, Denver, and Houston.
On the first point, unit cost per available set mile (CASM), ex-fuel, was down 0.2% for the year, making it an industry leader on that metric. Furthermore, the company recovered 98% of the yr/yr increase in fuel prices in 2018., helping to push its adjusted pre-tax margin higher by 0.9% versus 4Q17.
What most investors are focused on is the company's growth strategy. This primarily includes ramping up productivity and capacity through a new series of routes out of its hubs, mostly to smaller destinations, which typically carry higher fares. In fact, it has already announced 22 new domestic routes for 2019, in a push to capture market share from the likes of DAL and AAL. The risk here is that UAL is banking on its competitors keeping a lid on their own capacity, rather than trying to compete with UAL in these new markets. Should DAL and AAL push back by adding new flights out of these smaller cities, the result could be a sharp drop in fares as more supply enters the market.
So far, though, UAL is proving its skeptics wrong as its growth is outpacing the industry. That said, there are still several potential hurdles ahead for UAL, and the airline space in general, including a slowing economy in China as well as the ongoing government shutdown.