Clear skies ahead for United Continental

By cutting costs and investing in an upgraded fleet, this company is set to prosper in an improving airline industry.

By MoneyShow.com Jan 23, 2014 5:00PM
MoneyShow.comImage: Airplane at gate (© Brand X/Jupiterimages)By Geoffrey Seiler, Bullmarket.com

The airline industry was one we largely ignored in years past given its long history of boom-and-bust cycles; but there has been a profound change in the way most airlines now operate, and the industry has figured out how to make money on a consistent basis.

Our top pick for 2014 is United Continental (UAL). Consolidation has been the biggest driver of the industry's newfound embrace of rational business practices.

United and Continental merged in 2010 and the new United is a case study of how the industry has refocused its business.

United is upgrading its fleet to newer, more fuel-efficient aircraft; it is intent on using its mileage and amenity programs to drive loyalty and raise revenue; it has poured money into enhanced IT systems, which are helping it to better manage available seats to maximize revenue and lower costs; and the company is much more disciplined in the management of its capital.

Cost reduction will be one of the drivers for United's performance going forward, but the company is also making sensible investments in its product.

The company benefits from being one of the largest carriers in the New York City market and that has helped it to secure a number of corporate travel partnerships that help funnel business travelers onto its planes.

The risks for United include the potential for one of its competitors to veer from the current focus on disciplined pricing and start cutting fares to boost loads.

There is also always the potential for another entrepreneur to try to start up another airline to compete with the majors, though the zeal for such ventures appears to have waned. But with the economy getting stronger, United is well positioned if the industry remains disciplined.

United's enterprise value is currently 4.8x its anticipated 2014 EBIDTA. Its P/E is 9.3x the Street's 2014 EPS consensus of $3.98. Delta (DAL), by comparison, trades at a 5.2x EV/EBITDA multiple and a nearly 10x forward P/E. While United's stock gained about 50 percent this past year, it has lagged the roughly 120 percent return for Delta.

Operationally, United underperformed this year, but with the integration of Continental now largely behind it, we think United's post-merger operational performance should take a similar trajectory to that of Delta -- the top airline performer in 2013 -- as its cost cutting program and investments begin to bear fruit.

An improved economy and pick-up in business travel only add to its allure. This in turn should put the stock in position to outperform in an industry that has regained investor interest.

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1Comment
Jan 24, 2014 9:26AM
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My wife & I do not fly a lot...but my experiences are that United has horrible customer service. Unfortunately where we live United (IAH) is the only option without driving an extra 45 minutes to

Houston Hobby for Southwest or Jet Blue. How can they justify $460 to Missouri versus $238 to New York City?. Maybe I'm still a little bit ticked off because they lost my luggage last time I flew on United.

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