The Zhitong Finance App learned that Goldman Sachs indicated that the third quarter results announced by United Continental Airlines (UAL.US) were in line with expectations. In terms of guidance, the company gave fourth-quarter earnings per share guidance that fell short of market consensus expectations due to rising aviation fuel prices, but fourth-quarter revenue guidance was higher than expected.
On Wednesday, the stock price of United Continental Airlines closed up 4%, outperforming the other stocks covered by Goldman Sachs after excluding this stock, and also outperforming the S&P 500 index, which rose about 0.5%. Goldman Sachs believes that the main driving factor behind the performance of United Continental Airlines' stock price performance on Wednesday was that the fourth quarter revenue guidance given by the company was better than expected. The company expects unit revenue (RASM) growth to accelerate in the fourth quarter, while Goldman Sachs previously predicted that RASM growth would slow down. According to the bank's recent communication with investors, investors also generally expect RASM's growth rate to slow down before the financial report is released.
Considering the sharp rise in aviation fuel prices over the past few months, Goldman Sachs is also encouraged by management's statement: management is willing to make certain trade-offs in passenger occupancy rates to increase profitability and ensure that revenue can cover fuel costs, because this approach helps maximize RASM and profit margins. Management also stated that relevant measures will continue to be taken if further adjustments to capacity are necessary.
The growth momentum is expected to continue. The trend of corporate travel demand close to travel dates is still strong. The growth rate of RASM for international routes is expected to accelerate, and many previously underperforming markets are also expected to improve. Although Goldman Sachs expects aviation fuel prices to remain high for a long time, delaying United Airlines' goal of achieving double-digit profit margins in 2027, the bank expects the company to remain one of the most profitable airlines in the industry.
Goldman Sachs gave Continental Airlines a “buy” rating and adjusted the target share price to 152 US dollars. There is still room for a 50% potential increase compared to the current stock price.
Double-digit pre-tax profit margin target
Management pointed out that achieving double-digit pre-tax profit margins in 2027 will be a challenge because aviation fuel prices are expected to remain high and the industry's capacity is likely to accelerate growth.
United Airlines' own series of initiatives are expected to drive RASM improvements, including gaining more market share as Starlink (Starlink) services continue to be launched, but these measures alone may not be enough to achieve the goal. Management emphasized that in addition to United Airlines' own growth drivers, achieving this goal in 2027 may require favorable changes in at least one of the following three additional factors: lower fuel prices, reduced industry capacity, or the continued willingness of the entire industry to sacrifice passenger occupancy rates to increase profitability.
Cost outlook
United Airlines' third-quarter unit costs (excluding fuel, CASM ex-fuel) rose 7.8% year over year, better than the 8.0% market consensus forecast before earnings release and 8.3% expected by Goldman Sachs.
Management anticipates that the third quarter will be the high point of CASM ex-fuel growth, and the fourth quarter growth rate will slow down and decline significantly in 2027. The company pointed out that the high cost increase in the third quarter reflected the overall cost impact of flight attendant labor agreements and the impact of capacity cuts close to the departure date. Excluding the negative effects of the latter, CASM ex-fuel for the third quarter was generally in line with expectations at the beginning of the year.
Looking ahead to 2027, management continues to target the long-term CASM ex-fuel framework, which is 2% to 3% annual growth. Among them, the increase in aircraft seat specifications will be a favorable factor, helping to partially offset inflationary pressure, including the pressure brought about by rising distribution costs and airport costs.
Management pointed out that efforts are still needed to achieve this cost target next year. Management also emphasized that if capacity is cut below the original plan, the profit margin can be maximized, and even if this puts upward pressure on CASM ex-fuel, the team will always prioritize managing profit margins rather than simply seeking to control CASM ex-fuel.
Revenue Drivers
Management pointed out that in the third quarter, Central America, the Caribbean, Florida (Florida RASM increased 26% year over year), Newark, and London's unit revenue (RASM) performance was relatively strong compared to the rest of the entire route network; Hawaii, the South Pacific, and Chicago lagged behind.
Regarding the underperforming market, management said that the trend in the Hawaiian market is expected to improve in the fourth quarter; from April 2027, the trend in the Chicago market is expected to change from a drag factor to a driving factor as restrictions on Chicago O'Hare Airport will limit capacity from the US Federal Aviation Administration (FAA). United Airlines expects a very limited increase in domestic aviation capacity in the market where Chicago O'Hare Airport is located from the second quarter of 2027.
Demand for corporate travel remains strong. The total revenue of the enterprise business increased by 22%, including a 15% increase in yield and an increase of about 1 percentage point in the customer occupancy rate. The year-on-year increase in revenue for contract enterprise customers was even higher, reaching 26%.
Looking ahead, management expects business travel to be once again strong in the fourth quarter. Management pointed out that there is still room for improvement in the contribution of corporate travel to occupancy rates, because compared with 2019, this indicator is still 4 to 5 percentage points lower.
2027 capacity outlook
Although management has yet to officially give 2027 capacity guidance, it has provided some information on key drivers of future capacity growth.
The company expects to receive 24 wide-body airliners and 100 narrow-body airliners in 2027, including the MAX 10 with larger airframes. Management anticipates that the increase in aircraft seat specifications will be one of the factors driving capacity growth in 2027. Management also anticipates that the growth rate of high-end class capacity will exceed that of economy class capacity in 2027.
As for which regions in the route network will be the focus of growth, management plans to shift the focus to coastal hubs and growth opportunities in the international route network as the United Airlines' “United Next” plan is expected to be basically completed by the summer of 2027.
balance sheet
United Airlines had liquidity of $17.7 billion at the end of the third quarter and repaid approximately $1 billion in debt during the quarter. The company also issued 900 million US dollars in debt, and its fixed interest rate equivalent financing costs were in the low range of around 5%; at the same time, it expanded the revolving credit line from 3 billion US dollars to 5 billion US dollars, increasing available liquidity.
The company aims to maintain liquidity at $18 billion by the end of fiscal year 2026. Expanding the revolving credit line is expected to save approximately $70 million in interest and expenses each year; if the management team chooses to raise additional liquidity through other means, the costs may be higher while maintaining the same level of liquidity.
Management pointed out that increased liquidity should not be viewed as creating more options for the company to choose from for mergers and acquisitions, but rather as a relatively low-cost insurance purchased in an environment of fluctuating fuel prices.
At the end of the third quarter, the company's net leverage ratio was 2.4 times. Management reiterated that it will continue to aim for a net leverage ratio of less than 2 times and remains committed to the financial targets required to achieve an investment-grade credit rating by 2027.
Prospects, Valuation and Risks
Goldman Sachs slightly lowered its fourth quarter earnings forecast for United Continental Airlines to $1.00 (FactSet market consensus forecast was $1.72); it lowered its 2026 earnings forecast per share from $6.75 to $6.73 (market consensus forecast of $7.85). The adjustments reflect the latest impact of rising fuel prices, but were partially offset by better-than-expected revenue trends.
Goldman Sachs lowered its FY2027 earnings forecast from $11.30 to $9.75 (market consensus forecast was $12.58) and lowered its FY2028 earnings forecast from $15.45 to $13.35 (market consensus forecast of $17.61). These adjustments also include the impact of rising fuel prices, while readjusting forecasts based on better revenue trends.
Goldman Sachs lowered its 12-month target share price from $160 to $152 because the bank adjusted its share forecast and lowered the target corporate value and profit before interest, tax, depreciation and amortization (EV/EBITDAR) ratio from 5.0 times to 4.9 times to reflect the rising geopolitical risks driving high aviation fuel prices.
The main negative risks include rivals reacting to United Airlines' growth plans, thereby weakening the benefits of the route network restructuring; further delays in aircraft delivery plans; and the currently observed stagnation in corporate travel recovery — compared to peers, United Continental is more dependent on this revenue source.