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United Airlines (UAL) is flying higher after reporting strong 1Q25 earnings that easily beat expectations, even as domestic travel demand softened considerably during the quarter. Driving the better-than-expected EPS was a 9.2% increase in high margin premium cabin revenue, which outpaced Delta Airlines' (DAL) Q1 premium cabin revenue growth of 4%, and a sharp decline in fuel expense (-12.2% yr/yr). Encouragingly, UAL also stated that booking trends have been stable despite the rising macroeconomic concerns surrounding tariffs, making its initial FY25 EPS guidance range of $11.50-$13.50 the base case scenario.

Given the unpredictability of the macro environment, UAL also provided guidance for a recessionary scenario in which operating revenue incrementally decreases by five points in 2Q25-4Q25. The decline in revenue, combined with further capacity reductions and no additional cost relief from fuel, would result in FY25 EPS of $7.00-$9.00.

• As anticipated, the domestic business was a weak spot in Q1 with revenue falling by 3.8%, marking a sharp drop from last quarter's growth of 11%. UAL and its competitors are seeing weakness among more price-sensitive customers, prompting capacity cuts, particularly in off-peak flights.
• Still, capacity rose by nearly 5% for UAL in Q1, outpacing DAL's increase of 4.2%. Thanks to enduring strength for higher-priced international flights, RASM edged higher by 0.5% despite the capacity increase and sluggish domestic travel demand. Like last quarter, Pacific was the standout performer with RASM up 8.5%, followed by Atlantic at 4.7%.
• Starting in 3Q25, UAL will begin capacity reductions, including a 4% domestic capacity cut. This move will help to rebalance supply with demand, supporting pricing and margins. On a yr/yr basis, UAL's adjusted pre-tax margin was already strong in Q1, improving to 3.6% compared to (0.6)% in the year-earlier quarter.
• A key component of UAL's strategy to drive margin and profit growth is to focus on its premium business, especially through the development of its Polaris business class. The company is enhancing Polaris with new Polaris Plus suites that have sliding doors, more spacious seats, and exclusive amenities such as private check-in, priority boarding, and upgraded bedding. Additionally, UAL is investing in technology and customer experience improvements, including faster WiFi via Starlink installation and new features on the United app.

UAL's 1Q25 results demonstrate solid operational resilience and margin expansion in a tough business climate, driven by strong premium and international demand. While the company remains optimistic for FY25 under stable demand conditions, macroeconomic uncertainties necessitate cautious capacity management and scenario planning, including the issuance of guidance under a recessionary environment.