1 Airline Giant Just Raised Its Guidance as the Air Travel Recovery Continues

Just a few months ago, U.S. domestic air travel demand remained weak because of high COVID-19 infection rates in parts of the country. International demand was even worse, as many countries had closed their borders except for essential travel.

However, demand has come roaring back since February. With demand trends continuing to improve, United Airlines (NASDAQ:UAL) recently boosted its outlook for unit revenue and earnings for the second quarter. The full-service airline expects this momentum to continue into the third quarter as well.

Americans return to the skies

As recently as the last seven days of January, fewer than 5 million people passed through TSA checkpoints, down more than 62% from the same period in 2019. Since then, the rapid rollout of coronavirus vaccines and declining COVID-19 case counts have helped drive a surge in demand. Over the past week, the TSA has screened more than 11 million passengers at its checkpoints, down about 32% from 2019 levels.

Huge crowds in a busy airport terminal.

Image source: Getty Images.

If anything, the demand recovery could strengthen over the next few months. First, vaccination rates continue to climb week by week. Second, Memorial Day weekend marks the traditional start of the summer peak season for leisure travel. Third, some key European tourist markets — including Iceland, Greece, Italy, Spain, and Portugal — are reopening to vaccinated American travelers.

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United raises guidance

On Tuesday, United Airlines confirmed this brightening demand picture at an investor conference. The airline said that yields (i.e., prices) on tickets sold during May for travel during the second quarter have been similar to 2019, thanks to strong domestic leisure demand. In fact, yields for domestic leisure travel have surpassed 2019 levels. (Other airlines reported similar trends.)

As a result, United now estimates that revenue per available seat mile (RASM) will come in 12% below its Q2 2019 level this quarter. Last month, it had projected that RASM would decline 20% compared to that benchmark.

With RASM exceeding expectations, United projects that its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin will recover to negative-11% this quarter, better than its initial forecast of negative-20%. The airline’s updated guidance implies an adjusted EBITDA loss of around $600 million on $5.5 billion of revenue, whereas its original outlook implied a $1 billion adjusted EBITDA loss on $5 billion of revenue.

A United Airlines jet on the ground.

Image source: United Airlines.

Looking ahead, United expects to record positive adjusted EBITDA for the month of June and for the third quarter, with domestic leisure yields exceeding 2019 levels during the summer peak between June and August.

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More work ahead

United’s guidance update represents an important step in the right direction. Still, achieving positive adjusted EBITDA is not the same thing as turning profitable. Interest, depreciation, and amortization together totaled nearly $1 billion for United Airlines last quarter. Thus, the company could post modestly positive adjusted EBITDA while still ringing up substantial losses. In addition, leisure demand will probably taper off this fall, in line with the airline industry’s typical seasonality.

Management aims to restore United Airlines’ profitability to 2019 levels or better by 2023. That will require a full recovery in business travel demand and long-haul international travel — not just the current rebound in domestic leisure travel.

Long-haul international leisure travel should bounce back once international borders reopen. By contrast, many airline executives — though not United’s leadership — acknowledge that business travel demand could remain well below 2019 levels for many years, due to growing comfort with videoconferencing technology.

Until business travel demand makes a full recovery or United proves that it can replicate its pre-pandemic profitability with a greater mix of leisure travelers, investors may be better off owning shares of airlines that are less exposed to business travel and long-haul international flights.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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View more information: https://www.fool.com/investing/2021/05/26/1-airline-giant-just-raised-guidance-air-travel/

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