United Continental Holdings Inc (NYSE:UAL), the airline best known for dogs dying in its cargo holds, announced its Q1 2018 earnings yesterday after the close of trading. United stock has a history of big moves after earnings announcements, both good and bad, so it’s not surprising that the good news it delivered Wednesday pushed UAL higher by more than 6%

Going into its latest quarterly report I considered both the positive and negative aspects of United earnings and what that meant for the future direction of UAL stock.

Here’s what I found.

Positive Earnings 

The analysts estimate for revenue and earnings per share in the first quarter were $9.01 billion and 45 cents; they came in at $9.03 billion and 50 cents, increases of 7.2% and 19.1% over the same quarter a year earlier and well ahead of analyst expectations. 

However, comparisons to earnings estimates are to be taken with a grain of salt. Another source I checked for Q1 2018 estimates for United stock had revenue coming in at $8.96 billion with earnings per share of just 25 cents. Further, the Wall Street Journal had earnings per share in the first quarter of 40 cents, up 22 cents from a month ago and 41 cents from three months ago.

Take your pick. By any estimate, UAL had a successful quarter on the top and bottom line.

United did provide an investor update April 9 that showed passenger revenue per available seat mile (PRASM) was 2.7% higher in the first quarter with a 3.6% increase in available seat miles to 62 billion. Nothing changed in the week that followed. 

The one unanimous thought among analysts going into the report was higher earnings revisions the closer we got to its Q1 2018 earnings announcement. That turned out to a wise decision. 

Negative Earnings

United stock got hit earlier this year when it announced it was adding as much as 6% capacity in 2018, 2019, and 2020, while also potentially offering lower fares to take the fight to low-cost carriers.

“The best way to compete with low-cost carriers is to match their prices,” a United executive said on its Q3 2017 earnings call. “We can’t let low-cost carriers have price advantages in our hubs.”

Between higher labor costs, higher fuel prices and lower fares, United’s margins could be under pressure in this extremely competitive marketplace.

United’s plan for growth wasn’t sitting well with analysts who felt slower growth would be better for UAL earnings and UAL stock.

“While United’s belief appears as high as ever in the view that restoring domestic share in its hubs is the shortest path to margin expansion, the biggest missing ingredient from its presentation was any evidence that it is working,” wrote Evercore ISI analyst Duane Pfennigwerth in a January note to clients.

However, United has scaled back its expansion plans slightly, which is another reason United stock is up.

“This is somewhat encouraging following concerns around United’s growth aspirations, particularly in the domestic market,” said Savanthi Syth, an airline analyst with Raymond James.

The Long-Term Prognosis for UAL Stock

Personally, I believe an airline operating environment in which fuel prices are higher and fares lower suits Southwest Airlines Co (NYSE:LUV) far more than it does UAL, though that could hinge on the reaction to the recent engine failure in the near term.

“Let’s face it: The easy pickings have been gobbled up by all the big airlines, including Southwest. The next 12-24 months are going to be much more competitive — and I say that in a bad sense if you’re an investor —  than they were in the past two or three years,” I wrote April 10. “Revenues might be higher due to increased capacity, but profits will be lower due to higher costs and lower prices.”

There’s no question United delivered a winning quarter, but if you ask me, you still ought to be looking more closely at Southwest if you’re investing for the long haul. It’s the best of the big airlines.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.