United Airlines sees return to profitability in near term. Is the stock a buy?

The COVID-ravaged aviation sector hit the recovery path last year amid a rebound in passenger traffic, but the lingering uncertainty and resurgence in coronavirus cases slowed down the process. However, the latest data show that the worst is probably over for the industry, with demand bouncing back and flight operations resuming. Buoyed by the positive momentum, United Airlines Holdings, Inc. (NYSE: UAL) is looking to generate pre-tax profit in the first half, after languishing in the negative territory for a long time.

Investing in UAL

Last month, the airline’s stock slipped to a one-year low but made steady gains since then, paring most of the losses. It picked further momentum following this week’s earnings announcement. It is almost certain that the stock would not disappoint investors looking for long-term engagement, but it is likely to experience volatility in the near future.

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Read management/analysts’ comments on United Airlines’ Q1 2022 earnings

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Experts have assigned UAL moderate buy rating, and the consensus target price points to a 10% gain in the next twelve months. That said, United’s high debt and continuing losses make the stock a bit risky in the present situation. However, the management expects that the second quarter would be a historic inflection point for the business, considering the improving demand conditions.

Traffic Rebounds

Reflecting the stable recovery in passenger traffic, revenues picked up and reached $7.6 billion in the first quarter of 2022, which is sharply higher than in the prior-year quarter. Passenger revenue more than doubled, while the cargo segment registered double-digit growth. Consequently, adjusted net loss narrowed sharply to $4.24 per share from $7.15 per share in Q1 2021.

From United Airlines’ Q1 2022 earnings conference call:

“Looking ahead, even with the elevated fuel prices which we expect to persist for a while, right now, we are seeing our revenue more than cover the increased fuel cost and as a result, we expect to achieve meaningful pre-tax income in the second quarter. Furthermore, based on our current revenue expectations, we also expect to produce a pre-tax profit for the full year 2022.”

The improvement in the bottom line was restricted by a surge in operating expenses, mainly fuel costs. Passenger revenue per available seat miles declined sequentially, though there was a notable increase year-over-year. Meanwhile, first-quarter revenues declined by a fifth from fiscal 2019, which is considered a more relevant comparison due to the unprecedented disruption the industry experienced last year.

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ALK Earnings: Alaska Air Q1 loss narrows on strong revenue growth

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Among others, a similar pattern was visible in the financial performance of American Airlines Group (Nasdaq: AAL) and Delta Air Lines (NYSE: DAL) in their most recent quarters. Both companies anticipate an acceleration of the ongoing recovery starting the second quarter.

Risks

Back-to-back losses and heavy spending on infrastructure and aircraft fleet might put United’s finances under pressure in the coming months. Key restrictions like mask mandate and social distancing are expected to continue for airlines in the foreseeable future, delaying the recovery compared to other sectors. Also, with most airlines passing on the high fuel costs to customers by hiking ticket prices, travel demand might pull back due to trip cancellations.

UAL traded higher throughout Friday’s regular session and hovered slightly above the $50-mark. The stock has gained 10% so far this year.