On Tuesday, Redburn-Atlantic revised its rating on United Continental (NASDAQ:UAL), downgrading the stock from Buy to Neutral and setting a price target of $50.00. The shift in stance is attributed to a more cautious outlook on long-haul supply dynamics, coupled with ongoing inflationary pressures. The analyst noted that while United Continental has previously benefited from favorable long-haul capacity dynamics, expectations have been moderated due to an increase in supply and inflationary costs impacting the airline industry.
United Continental's pricing guidance suggests an optimistic recovery in unit revenues for the fiscal year 2024, despite flat year-over-year pricing expected in the first quarter. The first quarter is considered the easiest period for comparison due to substantial capacity growth in the first quarter of 2023. However, the anticipation of a strong recovery in pricing across most markets may not lead to significant capacity rationalization during the summer months, according to Redburn-Atlantic's analysis.
The analyst expressed concerns that the current schedules indicate an expansion in capacity, which could lead to negative pricing for United Continental in 2024. This is in light of all airlines expecting a robust rebound in pricing throughout the year, especially in domestic markets. The potential lack of capacity adjustments during peak travel seasons is seen as a limiting factor for the airline's pricing power.
United Continental has not provided formal commentary on cost progression for the current year, but Redburn-Atlantic anticipates low- to mid-single-digit inflation due to continued inflationary pressures on staffing and maintenance. Additionally, an accounting change in the treatment of distribution costs is expected to contribute to cost pressures. The grounding of the Boeing (NYSE:BA) MAX9 is projected to have a three percentage point impact on the first quarter's costs.
The analysis concludes that, despite a planned 3% increase in stage length, United Continental's cost per available seat mile (CASM), excluding fuel and normalized for stage length, will be the highest in the industry in 2024. This figure is estimated to be two percentage points above the airline's closest peer.
InvestingPro Insights
Amid the recent downgrade of United Continental (NASDAQ:UAL) by Redburn-Atlantic, investors are closely monitoring the company's financial health and market position. According to InvestingPro data, United Continental holds a market capitalization of $14.11 billion, suggesting a significant presence in the airline industry. The company's current P/E ratio stands at 5.43, which indicates that the stock is trading at a lower earnings multiple compared to some of its peers. This aligns with one of the InvestingPro Tips, pointing out that United Continental is trading at a low earnings multiple. Additionally, United Continental's revenue for the last twelve months as of Q1 2023 reached $53.72 billion, with a notable revenue growth of 19.49%, showcasing a strong financial performance despite industry headwinds.
Moreover, InvestingPro highlights that United Continental is a prominent player in the Passenger Airlines industry, which may provide some resilience against the challenges noted by Redburn-Atlantic, such as increased long-haul supply and inflationary pressures. The company's recent revenue growth could be a testament to its competitive position. While it's important to consider that six analysts have revised their earnings downwards for the upcoming period, InvestingPro also notes that analysts predict the company will be profitable this year, which could offer some optimism for investors.
For those seeking a more comprehensive analysis, there are additional InvestingPro Tips available, providing deeper insights into United Continental's financial outlook. Interested readers can find these tips and more detailed metrics by visiting the InvestingPro website and using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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