United Airlines UAL is benefiting from upbeat air travel demand. UAL’s proactive measures toward sustainability and innovation are praiseworthy. However, weakness in liquidity and increased operating expenses are hurting the company’s prospects.

Factors Favoring UAL

United Airlines' commitment to sustainability is commendable. The airline aims to achieve net-zero greenhouse gas emissions by 2050 and has purchased more sustainable fuel than any other U.S. airline in 2023.

In September, UAL and the San Francisco 49ers (American football team) announced that the team has become the first in the National Football League to purchase sustainable aviation fuel (SAF). An alternative to conventional jet fuel, SAF can bring down greenhouse gas emissions by up to 85% over its entire lifecycle, from production to end-use.

UAL’s top line is benefiting from buoyant air travel demand. In the second quarter of 2024, United Airlines saw a 5.5% increase in Revenue Passenger Miles and an 8.3% rise in capacity, measured by Available Seat Miles. The company anticipates this positive trend will continue, with management projecting third-quarter earnings per share in the range of $2.75-$3.25. For the full year, UAL expects EPS to fall between $9 and $11.

United Airlines’ proactive efforts to enhance its connectivity and meet the growing demand for travel is encouraging. The airline introduced 12 new domestic routes connecting major cities across the United States and Canada. It announced nearly 200 new flights to Milwaukee and Chicago. This expansion not only benefits travelers but also strengthens United Airlines' position in the competitive aviation market.

Shares of UAL have rallied 20.5% in the past year compared with its industry’s growth of 17.4% in the same period.

Image Source: Zacks Investment Research

UAL: Key Risks to Watch

The surge in operating expenses is adversely impacting the company’s bottom line, driven by increased labor costs and fuel expenses. In the second quarter of 2024, operating expenses surged by 3.1% year over year.

Labor costs, comprising salaries and benefits, which represent 31.4% of total operating costs, increased by 10.5% year over year. Aircraft fuel expenses rose by 11.1% year over year, pushing up the total operating costs.

United Airlines exited the second quarter of 2024 with a current ratio (a measure of liquidity) of 0.77. A current ratio of less than 1 indicates that the company is likely to struggle to meet its short-term obligations. Reduced pricing power is another concern.

Zacks Rank

UAL currently carries a Zacks Rank #3 (Hold).