United Continental Holdings Inc (NYSE:UAL) suffered moderate losses last week. United stock lost some lift as the March traffic led the airline to warn investors that it expects lower revenue for the first quarter. The company revised the figure from 7.25% to 7.75%. As for traffic, in March, it dropped by 1.5%.
Yet investors are bullish. On Monday, UAL stock was up by almost four percent in the morning because investors were encouraged by favorable traffic numbers. While the passenger count for March dropped 0.3%, it has increased 1.8% since the beginning of 2016. (Source: “United Airlines March Traffic Falls, Q1 PRASM Likely to Drop,” Yahoo! Finance, April 11, 2016.)
United has plans to expand routes and improve customer service in the middle to long term. The airline’s continuing fleet overhaul is one of its key strategies for renewal. But it also benefits from a wide array of joint ventures and shared service routes. (Source: Ibid.) One of the most promising shared service routes is with China Eastern Airlines, which has recently launched a new direct service between Beijing and Chicago, a major United hub.
Then there’s the Air China and United alliance, which is one of the best examples of United Continental’s successful joint ventures. Air China and United have a partnership that goes back 13 years. They operate many flights covering the most important routes between the U.S. and China through code-sharing. Air China has hubs in Beijing, Shanghai, and Chengdu. This helps to extend United’s service to passengers who can easily link to Air China’s hubs from most Chinese cities, given the scope of the airline’s domestic service. The new deal will be an opportunity to further cement the ties between the two companies.
As well, United Continental will add a nonstop flight between San Francisco and Xian, China next May. In July, it will add service between San Francisco and Hangzhou. The UAL-Air China alliance has allowed the two carriers to serve more than 2.7 million passengers between the U.S. and China.
United’s strategy for growth is ambitious. It wants to reclaim its spot as the number two carrier in the United States for traffic and it is on its way to that ranking, thanks to its current strategy of adding its own and codeshare flights. (Source: “United Airlines and Air China strengthen coordination to better serve customers in China and the US,” Bidness Etc, March 23, 2016.)
To facilitate the route expansion, United plans to renew its aging small aircraft fleet over the next three years.
United stock, as the market is already showing, will benefit from the airline’s route expansion plan. The downside, as we have noted in previous articles, is that the dollar continues to trade at a premium over most currencies. This makes tourism to the United States less attractive. The high dollar upsets traffic potential for U.S. airlines, which have significant operations abroad. Even when they accumulate revenue outside U.S. borders, the airline loses its worth upon repatriation.
Still, United stock is also feeling the effect of the return of its CEO Oscar Munoz from an extended sick leave. Munoz, a former president of CSX Corporation, has stressed the need to improve service. Better service is how United intends to rebuild traffic and catch up to American Airlines and Delta Air Lines, Inc.—the number one and number two biggest companies in the sector. United has suffered from service lapses as part of the teething problems resulting from its merger with Continental Airlines in 2010. (Source: “United Airlines’ New Chief Munoz Pulled From Railroad CEO Track,” Bloomberg, September 9, 2015.)
Indeed, the combination of a new customer service-focused CEO and a solid network of traffic-generating alliances is contributing to UAL stock’s potential. Analysts have a consensus 12-month target price of $72.50 for UAL. One analyst, Daniel McKenzie from Buckingham Research Group, goes as far as predicting $92.00! The lowest targets are still bullish, given that they range from $64.00 to $65.00. (Source: “Analysts Are Bullish on United Continental,” Yahoo! Finance, April 8, 2016.)