United Airlines continues to ‘aggressively invest’ in Boeing after the 2021 recovery hope: Analyst

Third Bridge Global Sector Lead, Industrials Materials and Energy Peter McNally joins Yahoo Finance Live for a discussion about United Airlines’ fourth-quarter earnings results and its future.

Video Transcript

DAVE BRIGGS United shares rise 4 and 1/2% following the announcement of outstanding Q4 earnings. Peter McNally, Third Bridge Global’s sector leader for industrials and materials, is joining us to discuss this. It’s a pleasure to meet you, sir. How was your first impression of the earnings?

PETER MCNALLY We understood, I believe, that there has been a lot of demand for air travel. American Airlines and Delta were able to help us understand that. However, I believe what stood out to me was the guidance for 2023. The Street is about $6 and 1/2, while EPS ranges from $10 to $12. This is attention-grabbing. For a comparison, in 2019, the company made just over $12 per shares. They are now almost back to where they were on a per-share basis in terms of profitability.

We’ve also been closely following United’s aggressive investment program. It looks like their capex of $8 billion and 1/2 billion will be higher than what American Airlines and Delta have planned. United is ordering lots of planes. This can be seen in the behavior of Boeing’s stock and the headlines about United ordering 787s or 737s. It’s quite a bit to take in, but the first section looks very positive.

SEANA SMITH Yes, I was curious about the capex figure of $8.25 billion. That’s more than the Street expected when it comes United. Is this too much? Does this give you any pause?

PETER MCNALLY It actually began in 2021. It wasn’t obvious how long it would take to recover from the pandemic. But, United placed its largest ever order for Boeing and Airbus planes. They have been aggressively investing since then, betting that the market will come back to normal and surpass preandemic levels.

You know that new planes are necessary to attract pilots. It’s also proven that customers prefer the newer planes. They are more efficient. United is truly investing in the future. The $8 and 1/2 billion figure is higher than what the Street is looking at, but it fits with United’s past performance over the last few years.

DAVE BRIGGS All airlines are experiencing headwinds, which include pilot shortages and supply chain problems when trying to get new aircraft. What does United have to do with this?

PETER MCNALLY The most exciting thing for United is their pilot negotiation. Delta set a precedent by offering a 30% increase to their pilots over the next 4 years, but United has some work ahead for them in negotiating with their own pilots. We’ve learned over the past two years that this industry is labor-intensive, labor-critical. It is their greatest cost. Pilots are essential for these planes to get off the ground.

SEANA SMITH Peter, what would you say about Delta? Or, if you will, United’s performance compared to that of some of its rivals? Delta was just informed last week. American just updated its guidance on what to expect for the fourth quarter. Are they better than its peers?

PETER MCNALLY United is betting aggressively on the possibility that this market will exceed its previous highs. It’s evident in United’s aircraft orders. They have the financial resources to make it happen. Delta’s participation in the pandemic was more successful, according to most metrics. United is actually betting on its success.

This is not limited to flying from one point to the next. They also invest in technology such as supersonic aircraft taxis and sustainable aviation fuel. These are relatively small investments but could pay off in the long term. United is confident in its future.

DAVE BRIGGS The big airline story in the past few months, if certainly the year, was the collapse at Southwest Airlines. I wonder how long it will take for them to get out of that mess.

PETER MCNALLY Right. Well, it is. According to Third Bridge experts, this project has been going on for quite some while. Southwest, as we all know, has not invested enough. I believe that this manifested itself during the holidays.

They are facing many competitive threats from both above and below. It’s no longer a low-cost carrier as it was once. There are many other airlines that offer lower prices. They have faced a serious threat from ultra-low-cost airlines such as Frontier and Spirit. But they have grown so large that they are directly competing with majors like United, Delta and American.

Southwest still has a lot to do. They’ve been more revenue-focused than they were in recent years, according to our experts. You know what? We’ll wait to see.

SEANA SMITH We’ll see. Peter McNally, it’s great to meet you. Thank you so much.