The airline sector has been in a difficult period since 2019, with a global pandemic, supply chain disruption, and economic challenges all impacting the bottom line. United Airlines (UAL) has seemingly emerged from this slump over the last year, with an impressive 135% return for investors. By steadily improving the balance sheet, expanding strategic efforts, and focusing on building revenues, I feel fairly bullish on the company’s prospects, and I believe this success could continue in the coming years.
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United Airlines Is Building Strength
In my opinion, the aviation sector was always going to come back in some capacity following the disruptive events I outlined, but it was all about which companies came out with the fewest bruises. Many saw debts spiral out of control, passenger care levels decline, and workforce contractual problems, but many will say the company has handled these challenges better than most.
For starters, management has been able to utilize the Star Alliance platform, the world’s largest airline group, to mitigate logistical problems. Having enhanced levels of connectivity, resilience, and global partnerships naturally makes things smoother from an operational perspective. However, it has also translated into revenue growth of 2.5% to $14.8 billion in Q3 of 2024.
Profitability also impressed the market, with the 9.7% margin far above expectations. This has likely been supported by record passenger volumes and improved on-time performance, enhancing customer satisfaction levels and loyalty, which are issues that have plagued many competitors over the years.
Balance Sheet Resilience
As I noted, many companies operating in the travel space saw revenues immediately drop to zero during the pandemic, leading to severe challenges with paying down debts, and supporting staff. United Airlines was no exception, but with a strong balance sheet now in place, even after such events, I’ve got confidence that it’s well positioned for future uncertainty.
Over the last year, management has aggressively paid down a $1.8 billion outstanding balance from the MileagePlus term loan, which had an 11% interest rate. This is a substantial amount of the company’s overall $31 billion debt load and will encourage investors that further reductions are ahead. With $14 billion in cash, the company is well positioned for potential acquisitions, improvement initiatives, or to continue paying down debts to below 2019 levels.
I’m also encouraged to see the company announce a $1.5 billion share repurchase program, which demonstrates to investors that shares are still potentially undervalued and that management is committed to rewarding shareholders.
Future Catalysts
Going forward, management’s ability to continue innovating and expanding operations will be key for further growth. That is why I’m happy to see United pushing for new international routes, with the largest expansion ever expected in the summer of 2025, with eight new destinations across the Atlantic and Pacific.
In addition, as competitors have found to their detriment, air fleets require constant upgrades and proactive maintenance, so I’m encouraged that management has been investing heavily in new aircraft and retrofitting existing planes. This has given the opportunity to incorporate sustainable aviation fuel (SAF) and advanced communications technology, such as SpaceX’s Starlink Wi-Fi service.
Furthermore, United’s loyalty programs and cabin services are another catalyst to consider. Indeed, further investments in its MileagePlus program have fostered relations with frequent customers, providing a range of rewards and benefits, with the program now being a significant driver of overall revenues.
Addressing Sector Challenges
The aviation sector is far from being out of the woods after the last few years of challenges, but I’m confident management has the resources and experience required to do so over time. However, the economic uncertainty at present shouldn’t be underestimated. With interest rates likely to remain higher for longer, there could easily be further economic slowdowns and declines in consumer demand for travel.
I’ve also got one eye on fuel prices due to the geopolitical instability at play. With an incoming administration, talk of multiple tariffs, and continued war across the world, nobody can be entirely sure of what is next for energy markets. Although I’m encouraged by recent moves to incorporate sustainable aviation fuel, this will be an ongoing challenge for all in the sector.
There’s also the ever-present risk of rising labor costs amid high inflation. Many companies have seen disruption due to workforce strikes. United’s recent discussions with labor unions have emphasized the importance of finding the right balance, but this could change quickly if the economy takes a turn.
Considering the Valuation
When it comes to United’s valuation, I like what I see. While the wider industry has a median P/E of 23, UAL stock currently trades at just 9. Furthermore, EPS is growing at a whopping 70%, far ahead of the rest of the sector at just 8%. While this is unlikely to continue at the same rate, it will help to continue the positive momentum seen in shares over the last year.
Wall Street analysts generally agree with the likelihood of further upside, with a Strong Buy rating and an average price target of $108.93. With 14 upward earnings revisions in the last three months alone, the market seems to be confident this can continue.
I’d perhaps be slightly more conservative after such an extended rally, but I see no reason why the company cannot continue higher if it can execute its expansion strategy and steadily improve its balance sheet over the next few quarters.
Wrapping Up
After a great performance in 2024, United Airlines has shown it has all the factors needed to succeed after a difficult few years for aviation. Although many will suggest this is priced into the share price, I like what I see in the balance sheet, in the expansion strategy from management, and in the valuation metrics. Therefore, I’m bullish that patient UAL investors with the right tolerance for risk will see positive returns over the coming years.
