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Are rising fuel costs weighing down the United Airlines share price?

The United Airlines [UAL] share price is rapidly losing altitude. Over the past month, the stock has lost circa 15%, mirroring a sector-wide sell-off that has seen Delta Air Lines [DAL] lose 7.2%% and the U.S. Global Jets ETF [JETS] drop 9.1%% as of 16 July’s close.

Higher fuel prices, the ongoing cost of COVID-19 and questions over whether corporate and international travel passengers can get back to pre-pandemic levels — if at all — have all weighed on the sector.

If the United Airlines share price is to take off following its second quarter earnings announcement, the company will have to show investors how it’s meeting these challenges.

15%

United Airlines share price fall over the past month

  

What could move United Airlines share price post-earnings?

United Airlines is doing better than it was at the height of the coronavirus pandemic, but a full recovery will be a long haul journey yet. In March’s first quarter results, the airline returned to positive cash flow with a stated goal to return to positive adjusted EBITDA in the next few years.

Scott Kirby, CEO of United Airlines, said in a statement following its first quarter earnings release that he was encouraged by the strong evidence of pent-up demand for air travel. His goal is to “exceed 2019 adjusted EBITDA margins in 2023, if not sooner”.

Adding fuel to the recovery is a returning demand for air travel, even if business and international travel demand remained 70% below 2019 levels in the first quarter. Still, subsequent quarters should benefit from more passengers in the skies. US airports screened 2.15 million passengers on 15 July, according to the Transportation Security Administration (TSA) — a significant improvement from the 706,164 seen during the same period in 2020, but still off 2019’s 2.7 million. 

United Airlines is making a big bet on its continued resurgence with an order for 270 Boeing and Airbus planes worth $30bn. Last month, the company said July will be its first profitable month pre-tax income since January 2020. While United Airlines is all but certain to post a loss for the second quarter, this is a step in the right direction as the airline continues its recovery journey. 

Headwinds include a jump in fuel costs, with jet fuel prices having risen 76.3% (as of 9 July) over the past year, according to energy information provider S&P Global Platts.

76.3%

Rise of jet fuel prices over the past year

  

What are analysts saying?

United Airlines got hit by not one but two downgrades in July.  Evercore analyst Duance Pfennigwert downgraded the stock from outperform to in-line, while trimming his price target from $66 to $55. Pffennigwert suggests that asking investors to wait for a full recovery without a meaningful improvement to the bottom line until the middle of the decade was too much.

The other downgrade came from John Staszak, a securities analyst at Argus, which changed his rating from buy to hold. While applauding United Airways cost-cutting measures, Staszak cited a note of caution over its reliance on corporate and international flights.

 

When is United Airlines reporting Q2 results?

20 July

 

What is Wall Street expecting?

Wall Street expects United Airlines to post a loss of $4.23 per share, an improvement on the $9.31 loss per share seen in the same quarter last year. Revenue is pegged at $5.25bn, up 225.8% from last year’s $1.48bn. It’s worth pointing out that the triple-digit growth is due to comparing the forecasts with last year’s pandemic-ridden results.

$5.25billion

United Airlines predicted Q2 revenue - a 225.8% YoY rise

  

The airline itself is benchmarking its recovery against pre-pandemic levels. In the second quarter, it expects total revenue per available seat mile to be down approximately 20% from the second quarter of 2019. Capacity is expected to be 45% compared to the second quarter of 2019. How close United gets to landing this guidance — along with its third quarter outlook — could move the share price post-earnings.

Wall Street is predicting a full-year loss of $12.93 per share before posting earnings of $3.15 a share in 2022.

The average price target from analysts tracking the stock on Yahoo Finance is $62.33 — 35.5% upside on 16 July close. Of the 18 analysts offering recommendations, two rate United Airlines a strong buy and four a buy. The majority rate the stock a hold.

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