United Airlines Investors Lose Patience Following Tepid Outlook

(Bloomberg) -- United Airlines’ promise to catch up to Delta’s profits may be haunting the carrier as some investors grow impatient that the target may be slipping away.

Analysts grilled United managers about their plan for fast growth and their disappointing outlook for the third quarter. The shares fell the most in almost a year.

“What is the point of growing faster than GDP, faster than your peers, while your margins are still declining?” Evercore ISI analyst Duane Pfennigwerth asked during an earnings conference call Wednesday.

Chief Executive Officer Oscar Munoz last year pledged to narrow the profit gap with Delta, but the disparity appears likely to expand. Delta Air Lines Inc. last week said its passenger revenue for each seat flown a mile would increase as much 4.5 percent this quarter. United Continental Holdings Inc. forecast no more than a 1 percent gain -- and maybe a 1 percent decline.

Munoz is under increasing pressure to show that his aggressive move to increase connecting flights this year at United’s major U.S. hubs and recapture lost market share will pay off in higher earnings. The risk is that the increased capacity instead weakens fares. United executives said their plan is on track will show better results by year’s end.

The shares fell 5.9 percent to close at $74.24 in New York, marking their biggest decline since August and the fourth-sharpest drop in the S&P 500 Index.

United’s middling outlook for this quarter obscured good news for the previous one. Revenue for each seat flown a mile, or unit revenue, climbed 2.1 percent in the second quarter. It was the first gain in two years. Revenue is rising in most global regions again, aside from Asia, where competition from Chinese airlines is fierce.

The Chicago-based carrier has started dozens of additional flights -- many of them to small cities with relatively little competition -- to try to win back what President Scott Kirby calls its “natural share” of the market. Because the added supply of seats is keeping a lid on fares, United expects U.S. unit revenue will be flat this quarter.

Bare Bones

United’s introduction of low-fare, Basic Economy tickets hasn’t yet helped earnings, despite the airline’s assurances that it would add to profit immediately. Some airlines haven’t yet rolled out their own versions of Basic Economy beyond a few markets. That means some rivals are selling seats with a full range of amenities at the same price that United is selling bare-bones, Basic Economy tickets. 

The dynamic should reverse later this year as other airlines offer low-fare tickets more broadly, Kirby said.

T. Rowe Price analyst Andrew Davis said investors fleeing United had unrealistic expectations off an immediate turn when Kirby joined the company as president last summer. That United’s stock sells for $74 and not $15 indicates the carrier’s progress over the past five years, Davis said.

“Is United Airlines worth 6 percent less as a business than it was yesterday? No,” he said.

But a profit drop from last year has cast doubt on United’s progress, Barclays analyst Brandon Oglenski said on the call.

“Your investors are looking for that earnings improvement,” he said. “What are some things that could change in the future if that traction doesn’t develop?”

To contact the reporter on this story: Michael Sasso in Atlanta at msasso9@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson