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United Continental: Is Something Amiss?

Continental United Airlines – N73275

One team of analysts wonders why United Continental’s revenue trends are so much worse than its peers.

(Barron’s) – Yesterday, United Continental Holdings offered a revenue outlook that was far worse than the ones provided by Delta Air Lines or American Airlines, confirming what the market already seemed to know: United just can’t keep up with its peers.

That’s reflected in their stock prices, as shares of United Continental have dropped 19% so far this year, while American Airlines has fallen 6.2% and Delta has declined just 3.7%. And after noting that United Continental’s revenue outlook is “well below peers,” Evercore ISI’s Duane Pfennigwerth and Raymond Wong observe that “something is amiss.” They explain:

United reduced its 3Q17 unit revenue outlook significantly, well below peers, to a decline of 4% at midpoint from flat previously. The implied decline in passenger revenue y/y despite 3 to 3.5% capacity growth is concerning. Our historical revenue regression works suggests a positive correlation between capacity growth and passenger revenue growth…something is amiss with United’s revenue that peers are not seeing to the same degree. One hypothesis: actively lowering pricing on the front end of the booking curve during peak demand periods is revenue destructive. We do not believe this can be viewed as a short term issue as this new team has yet to demonstrate the ability to course correct. In the face of startling weaker revenue trends investors need to believe that United will rethink its growth plans. We have heard nothing on that front yet.

Shares of United Continental have fallen 1.2% to $43.80 at 12:53 p.m. today, while Delta Air Lines has dipped 0.1% to $47.33, and American Airlines has fallen 1.2% to $43.78.

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