Overview

While only a single quarterly report, we think that our UAL short thesis is supported by first quarter results.  Excess capacity growth in a lower fuel price environment meshes poorly with UAL’s high cost position.  We think Munoz is an ethical, high quality CEO but will lack the operating flexibility to fix UAL’s competitiveness.  The reporting behavior of prior management has likely set an unrealistic profit expectation for investors.   We will let others summarize the quarter, and instead update a few key charts below.  Feel free to reach out for our UAL EQM Model/Dataset that updates our suite of metrics and charts.

Highlights

Liquidity Tightening:  Perhaps most disturbingly, UAL has moved to what the company has previously defined as its liquidity threshold.  John Rainey has guided that “The liquidity balance we need to run our business is between $5 billion and $6 billion and that includes the $1.3 billion revolver that we have today that allows us enough cash to manage some of the uncertainties in the business, but also deploy any excess cash in a way that is more shareholder friendly.”  (6/2015). Draining liquidity at peak profits is not a great way for a highly cyclical, leveraged, cost disadvantaged competitor to position ahead of what may be a recessionary environment later this year.

UAL | Turned Around? - UAL 1 4 22 16

UAL Domestic Share Loss Rate Unsustainable:  We see the introduction of Basic Economy and a portion of the differential PRASM guidance as an effort to stem share loss.  Reduced market share devalues UAL’s network relative to competitors.

UAL | Turned Around? - UAL 2 4 22 16

Frequent Flier Accounting No Longer Fluffing-up Results:  Comparisons to periods when frequent flier accounting assumptions change should prove difficult for UAL. 

UAL | Turned Around? - UAL 3 4 22 16

Costs Heading Wrong Way, Still:  UAL’s labor cost growth continues to outpace competitors.

 UAL | Turned Around? - UAL 4 4 22 16
 

 

Fuel Hedging Down With Oil Low:  Reductions in fuel price hedging may increase short-term earnings volatility, particularly if oil prices continue to move higher.

UAL | Turned Around? - UAL 5 4 22 16