United Tumbles After CEO Leaves Wall Street Skeptical of TurnaroundBy
‘I don’t think those numbers mean very much,’ analyst says
JPMorgan sees widening profit gap with industry leader Delta
United Continental Holdings Inc. left Wall Street guessing on how it would get its turnaround back on track next year, drawing scorn from analysts and sending shares to their biggest drop in eight years.
After issuing an underwhelming profit forecast for the current quarter, Chief Executive Officer Oscar Munoz faced a testy call with analysts looking for answers. They repeatedly asked about United’s 2018 expansion plans after this year’s rapid growth added to pressure on fares, and they questioned the company’s projections on improving profits.
“I don’t think those numbers mean very much to anyone anymore,” Citigroup Inc. analyst Kevin Crissey said. Added Brandon Oglenski of Barclays Plc, “What is it that happened this year that we didn’t anticipate at the investor day last year?”
The tensions raised the pressure on Munoz, who has been under fire this year for fighting a price war with discounters, bobbling the rollout of a new no-frills product and mishandling the furor when a passenger was dragged off a plane in April. Now the lack of clarity on next year’s plans is denting faith in the CEO’s efforts to improve service and juice profits at the longtime laggard in the airline industry.
“When I look at your absolute earnings, they’re down more than your competitors’,” Oglenski said on the call. “Your relative margin gap is widening, not narrowing. And more importantly for the investors on this call, the stock is now down, let’s call it, 20 to 25 percent versus the market this year.”
The shares tumbled 12 percent to $59.78 at the close in New York, the sharpest decline since Oct. 21, 2009 -- a day when two major airlines reported losses and failed to reassure investors that business travel was recovering from the recession.
United has dropped 18 percent this year, the biggest slide on a Standard & Poor’s index of the five biggest U.S. airlines. The industry gauge has climbed 4.1 percent.
“I think the conundrum is how do we give you a sense of the results of these long-tailed initiatives and provide you a little bit better transparency?” Munoz said on the call.
“It’s hard to prove to you how well some of our initiatives are working or the fact that they are working, and the headwinds have been significant,” he said. “The inconsistencies that I think you’re picking up are just a function of time and structure. We are in the middle of a planning process.”
Munoz, 58, took over in 2015 after his predecessor left amid an internal inquiry into the airline’s ties to the former chairman of the Port Authority of New York & New Jersey. Munoz then suffered a heart attack and underwent a heart transplant before returning to work the following year.
A former railroad executive, he then forged labor peace and laid out turnaround plans, stoking a share rally. He brought in American Airlines Group Inc. veteran Scott Kirby as president. Earlier this year, United’s market value briefly topped that of American, which has a larger fleet.
But the winning streak petered out. United suffered a public-relations fiasco from the dragging incident. Analysts faulted it for endangering its profit goals by implementing a no-frills “basic economy” offering too widely.
It also waged a fare war this summer against discounters at its major hubs. That brought bargains to passengers while undermining the pricing power investors are looking for after years of industry consolidation that left only four major U.S. carriers.
For the fourth quarter, United’s forecast for a pretax profit margin of no more than 5 percent means the carrier will fall further behind industry leader Delta Air Lines Inc., according to JPMorgan Chase & Co. Based on company projections for operating profit, United’s margin is set to trail Delta’s by 7 percentage points, JPMorgan analyst Jamie Baker said in a note to clients.
If the outlooks prove accurate, “this would represent the single largest fourth-quarter deficit since the United-Continental merger” of 2010, Baker wrote.
Costs are rising and investors are losing confidence that United can keep them below its long-term goals, Joe DeNardi, an analyst at Stifel Financial Corp., said in an interview after the call. Skepticism is rising that United can hit its targets for higher profits with a series of initiatives laid out last fall, he said. The airline said earnings would rise $1.8 billion from this year to the next, according to a presentation to investors late last year.
“There was a perception that management really backed off the earnings initiatives that they laid out last year,” he said. “The numbers aren’t adding up at this point. That really gives investors less confidence that they’re going to be able to close the margin gap with Delta.”
Munoz and Kirby on Thursday declined to give clues on their plans for 2018 seating capacity on Thursday, sparking concern among investors. This year’s expanding supply of flights and seats has added to pressure on fares. So has the price war that broke out this summer with Spirit Airlines Inc.
Tickets purchased shortly before travel, or walk-up fares, are “as low as I’ve ever seen them,” Kirby said on the call.
United is planning 3.5 percent capacity growth for the fourth quarter. That’s at the high end of a full-year estimate it gave in July and a faster pace than rivals. Passenger revenue for each seat flown a mile will fall 1 percent to 3 percent, the airline said. That’s after a third-quarter decline of 3.7 percent in the benchmark figure, also known as unit revenue -- a drop that followed a short-lived recovery.
Macquarie Group lowered its fourth-quarter earnings estimate to 83 cents a share from $1.11, citing the unit-revenue forecast and an expectation of higher fuel prices.
The severe storms that struck the southern U.S. and the Caribbean reduced pretax income in the third quarter by $185 million, United said. The company was forced to close its Houston hub for days because of severe flooding caused by Hurricane Harvey.
Adjusted third-quarter profit dropped to $2.22 a share, exceeding the $2.19 average of analyst estimates compiled by Bloomberg. Revenue at Chicago-based United was little changed at $9.9 billion, in line with expectations.