Upside for UAL Stock?
In recent months, some 11% of United Continental Holdings Inc’s (NYSE:UAL) value has vanished. UAL stock suffered from the higher U.S. dollar and potential labor issues.
The dollar causes a U.S.-based airline to lose on international routes, even if it generates considerable revenue. UAL simply loses on the conversion from other currencies.
However, the good news for United is that the dollar has stopped its sharp climb as the Fed has decided to avoid raising interest rates again—at least for the time being.
The better news for this year is that United Continental has also resolved the labor issues that were holding the company back. UAL stock’s performance has not acknowledged this news yet, given the overall market malaise today. Nevertheless, the airline has concluded a series of agreements with the union representing the various technical ground personnel, which is good news for the stock’s future performance and its investors.
These new collective agreements, which will be in force until 2021, notably provide for wage increases of nearly 30% by the end of that period. Employees must still ratify these agreements, but they signal an easing of relations between the International Association of Machinists & Aerospace Workers and the airline.
Relations between the two had worsened over the course of the past year. The union and United spent four months negotiating before they could find a mutually beneficial contract. The union members will vote on the contract next April 15.
Overall, the labor negotiations were one of the toughest knots to unravel since the 2010 merger between United and Continental and employee morale suffered. (Source: “United Airlines, Union Agreed On New Contracts,” Jobs & Hire, April 5, 2016.)
United was looking for ways to improve its uneven labor management history. The new agreement is the best way to herald the start of new leadership from CEO Oscar Muñoz. He took back control in late March after recovering from an illness that kept him away from the post since last September. With the labor disputes resolved and Muñoz back at the helm, United can now redirect energy on strengthening and even improving and expanding its fleet to become more efficient.
Clearly investors expected the CEO’s return to be favorable to UAL stock, as shares have risen sharply since mid-February, just before Muñoz’s return. UAL stock moved from a range of $45.00 per share to the current $55.00 to $57.00 range. The stock could see support strong enough to reach last year’s $60.00 to $65.00 trading range as the busy summer travel season approaches. United stock’s all-time high was $73.00 in January 2015.
Muñoz has experience in both managing transportation outfits and in turning companies around. He turned CSX around, battling hedge funds for control. He turned the company into a leader of customer focus, reliability, and financial performance. (Source: “United Continental CEO Battled Hedge Funds At CSX,” NASDAQ, March 9, 2016.)
As COO of CSX, he also managed to increase top-line revenue and earnings and the return on investment for stakeholders. (Source: “Here’s why Oscar Munoz made the surprising move from CSX to United Airlines,” Jacksonville Business Journal, September 15, 2015.)
As for United Continental, now that the labor agreement is essentially done—it needs ratification but that is expected—Muñoz will focus on increasing earnings and improving customer service. United Continental needs both, particularly as competition is increasing with China Eastern Airlines launching a new direct service between Beijing and Chicago, a major UAL hub.