What Drove A 3.5x Rise In United Airlines’ Profits In 2023?

United Airlines (NASDAQ: UAL) saw its net income surge by 3.5x y-o-y to $2.6 billion in 2023. This can primarily be attributed to higher revenues, and lower fuel costs. In this note, we discuss United Airlines’ margin profile along with its stock performance lately.

Firstly, let us look at United Airlines’ stock performance. UAL stock has witnessed gains of 15% from levels of $45 in early January 2021 to around $53 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. However, the increase in UAL stock has been far from consistent. Returns for the stock were 1% in 2021, -14% in 2022, and 9% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that UAL underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and RTX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UAL face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, UAL stock looks like it has some room for growth. We estimate United Airlines’ Valuation to be $60 per share, reflecting over 10% upside from its current levels of $53.

United Airlines Has Seen Its Operating Margins Expand 

United Airlines’ operating income more than doubled from $2.5 billion in 2022 to $5.3 billion in the last twelve months. Its operating profit margin expanded from 5.5% to 9.7% over this period. The company saw its SG&A expenditures as a percentage of revenue rise from 3.4% to 3.7% over this period. Among major expense items, the company saw a 3.5% fall in total fuel expenses, despite higher sales. The company’s average fuel price per gallon fell sharply by 17% to $3.01 in 2023, versus $3.63 in 2022.

Net Income Margin Is On The Rise

Along with the expansion of operating income, the company saw its net income rise from $737 million in 2022 to $2.6 billion in 2023. This can primarily be attributed to the company’s increased sales as well as its disciplined spending. On an adjusted basis, net income margin has expanded meaningfully from just 1.8% in 2022 to 6.2% in 2023. This resulted in earnings surging from $2.52 to $10.05 on a per share and adjusted basis over the same period.

The company’s outlook for 2024 is solid, with Q2 adjusted EPS expected to be in the range of $3.75 and $4.25, and $9 to $11 range for the full-year 2024. United Airlines’ revenue growth is expected to be driven by continued capacity expansion and elevated yields. The company’s $12.5 billion revenue in Q1’24 was up 9.7% y-o-y, driven by a 9% rise in available seat miles, while the passenger revenue per available seat mile was up 1%.

Given the robust travel demand, United Airlines should be able to continue to expand its margin profile in the coming years with disciplined spending, assuming a stability in fuel prices. Moreover, we think that despite its 25% rise this year, UAL stock appears to have more room for growth.

While UAL stock may see higher levels, it is helpful to see how United Airlines’ peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/12/2024
[2] Cumulative total returns since the end of 2016

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