Why United Continental Holdings Inc Stock Looks Murkier Now

UAL stock - Why United Continental Holdings Inc Stock Looks Murkier Now

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Kudos to United Continental Holdings Inc (NYSE:UAL) for taking the initiative to peel some market share away from the likes of Delta Air Lines, Inc. (NYSE:DAL) and American Airlines Group Inc (NASDAQ:AAL). Its competitors have been growing for far too long, while UAL stock has been losing ground. As United’s President Scott Kirby put it, “What we are doing is frankly catching up.”

Problem is, investors don’t exactly believe the air carrier can afford to “catch up.” UAL stock tumbled 11% on Wednesday in the wake of the announcements, which were paired with otherwise encouraging results.

Don’t misread the message.

News of United’s expansion plans sent a shockwave throughout the entire industry on fears that it would indeed get traction. Not only did shares of the other major players like Delta and American Airlines tumble, even smaller, more nimble regional and discount names like Southwest Airlines Co (NYSE:LUV) and Alaska Air Group, Inc. (NYSE:ALK) took a tumble. This initiative likely will work in terms of creating market share.

Problem is, UAL not only has to pay for it, but it also has to go through a paradigm shift in terms of pricing and cost control.

The Plan Behind UAL Stock

The four-pronged plan is simple enough. United Continental will focus on four key matters — the ‘Core4’ — going forward:

  • Unlocking the potential of its network
  • Invest more in people and technology
  • New and exciting customer experiences
  • Better efficiency and productivity

The airline believes that approach will fiscally justify the capacity increase of between 4% and 6% per year it’s planning for every year through 2020.

To justify the additional capacity en-route, United’s top brass conceded it would have to distinguish itself as a “caring” airline. Kirby went on to say “This is all about empowering our employees to do the right things for our customers and for each other. It begins with giving our supervisors the tools they need to be leaders, not just managers, and then allowing every single employee on the front line to use the Core4 to make the right decisions for customers.”

The new marching orders will kick off with training of front-line employees in direct contact with customers, explaining their new empowerment … and none too soon.

United Continental was the airline embarrassed in April of last year when its forcible removal of passenger David Dao from an overbooked flight was caught on video, which then went viral. Although law enforcement officers were ultimately blamed for overreach, they were only there at the request of United’s employees, and United did nothing to protect its customer.

The kicker: United is going to bolster the odds off filling more of those new seats by matching or beating its brethren. Kirby made a point of saying of the matter, “No one chooses to fly on an ultra-low-cost carrier if they can get the same price on United Airlines, nobody.”

It wasn’t all goals and slogans though. Hubs in Chicago, Denver Houston, Newark, NJ, Washington, DC, San Francisco and Los Angeles are all about to get busier.

Reality Check for UAL

With nothing more than a superficial look, current and would-be owners of UAL stock may like what they heard. United has been playing defense while rivals have been playing offense, and it’s time to be aggressive in front of what could be a major economic expansion inspired by tax cuts.

Even without the tax cuts though, air traffic is about to enter a phase of exponential growth.

The International Air Transport Association (or IATA) forecasts that 7.2 billion trips will be taken by air 2035, which is nearly twice the 3.8 billion that did so in 2016. Meanwhile, aircraft maker Boeing Co (NYSE:BA) is planning to build enough planes to meet the demands it expects to materialize over the course of the coming 20 years; it expects the air travel market to more than double by 2037. From that perspective, it’s arguable that United Continental is simply preparing for the future.

It’s not quite that simple or plausible though.

First, while the four-part plan makes for great posters and pep talks, top-down overhauls like this are tough. It has 87,000 employees who are accustomed to doing things ‘the old way,’ which doesn’t include keeping costs to a minimum so it can compete with the likes of Southwest or the other kings of low fares. It’s also quite difficult to teach a large group of employees to ‘care.’ Generally speaking, it can’t be taught. People either care, or they don’t, when they’re hired.

Above all else, however, the United expansion plan lacks the fiscal specifics that make these initiatives believable to shareholders.

That’s not to say those details won’t surface eventually. Kirby and CEO Oscar Munoz may not even be able to pin down the actual costs involved in this kind of growth, and that’s perfectly OK. The airline industry is a dynamic one, and plans need to constantly be adapted anyway.

Still, as Cowen analyst Helane Becker put it, “The stock is unlikely to reflect the company’s potential in the near term as we anticipate competitive actions and investor concerns regarding overcapacity. We understand the strategy but it might not mean a higher stock value.”

Bottom Line for UAL Stock

Again, kudos to any company for trying something different in an effort to grow. Too many companies would change nothing but expect something different anyway.

As far as corporate overhauls go though, this one raises more questions than hope. It may not necessarily be a reason to sell UAL shares you already owned (especially now that you’re down thanks to Wednesday’s big tumble), but it’s certainly not a reason to buy them. It could take years to see if this gambit will be worth the risk.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2018/01/united-continental-holdings-inc-ual-stock-murkier/.

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