Photographer: Tim Fadek/Bloomberg

United and American Lead Airline Shares to Two-Month High

  • Skepticism in United ‘is too negative,’ says hedge fund CEO
  • American boosts outlook on higher fares, lower fuel costs

U.S. airlines climbed to a two-month high after beleaguered United Continental Holdings Inc. won support from one of its biggest shareholders and American Airlines Group Inc. signaled that it’s gaining additional control over fares.

United shares could jump to $135 by 2020, or even higher under certain circumstances, said Brad Gerstner, chief executive officer of Altimeter Capital Management. Altimeter holds 3.3 percent of the carrier’s stock, the hedge fund’s top holding, and helped lead a proxy fight that overturned part of the airline’s board last year.

“You have to believe the historical skepticism which has been pounded into most financial analysts for decades is too negative,” Gerstner said late Monday at the Sohn Investment Conference in New York.

United climbed 5.1 percent to $78.79 at 2:26 p.m. Tuesday in New York. The gain led a Bloomberg index of U.S. airlines to rise as much as 3.1 percent to 131.35, its highest intraday level since March 3. American advanced 4.5 percent to $46.95.

Gerstner’s upbeat view followed similar support from Warren Buffett, whose Berkshire Hathway Inc. is United’s top shareholder.

The airline made a “terrible mistake” when it allowed a Chicago airport officer to pull a passenger from his seat and drag him off a plane in early April, Buffett said in an interview Monday morning on CNBC. The billionaire said the incident wouldn’t change his investment strategy, however. Berkshire reversed course on the airline industry last year, taking stakes in the four biggest U.S. carriers.

Unit Revenue

Chicago-based United on Monday said it continues to expect passenger revenue for each seat flown a mile, a proxy for pricing power, to rise by 1 percent to 3 percent in the current quarter. The figure, also known as unit revenue, hasn’t logged year-over-year growth at United since early 2015. Delta Air Lines Inc. led a rally of airline shares last week after saying its April unit revenue rose by 1 percent.

United also reported filling more of its seats with customers last month, with its “load factor” up by 2.6 percentage points over the previous year.

American said unit revenue would increase in a range of 3.5 percent to 5.5 percent this quarter from a year earlier. Less than two weeks ago, the Fort Worth, Texas-based carrier forecast a gain of 3 percent to 5 percent. Pretax margin will be 12 percent to 14 percent, compared with an April 27 forecast of 11 percent to 13 percent, American said in a statement Tuesday.

The new forecasts signal increased confidence by American that it will post unit-revenue gains for a third straight quarter, after a 2015 discount war and excess capacity had forced ticket prices down for about two years. Higher average fares and lower estimated fuel prices led to the improved outlook, American said.

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