Overview: United Continental Holdings' 2Q earnings (Part 11 of 11)
United’s current valuation
Although United’s revenue and cost structure has improved in the second quarter due to the various cost restructuring initiatives, there’s potential for further improvement because the company still hasn’t matched the higher margins generated by its peers. With a higher leverage compared to most of its peers, United’s debt coverage ratios such as debt to earnings before interest, taxes, depreciation, and amortization (or EBITDA) and net debt to EBITDA are also comparatively lower. Also, its current enterprise value to EBITDA is 8.22—the highest among its peers which reflects that the company is overvalued. Its competitors including Delta (DAL), American (AAL), Southwest (LUV), and JetBlue (JBLU) have lower multiples in the range of 6.48–6.69.
The fact that United has exceed management guidance for revenue and costs is a positive sign. Also, although United’s reported cost per available seat mile (CASM) has increased, part of the costs that drive CASM higher are non-recurring in nature. Since the expenses are directed towards cost restructuring efforts, the benefits will hopefully be seen in the long run.
On the revenue and margin side, United plans to improve network and scheduling by redesigning the flight structure in Chicago, Denver, and Houston hubs in the next couple of months. United also plans to increasing flight schedules during peak seasons and reduce schedules during periods of lower demand by timing maintenance visits according to seasonal demand and training and recruiting new flight crews. To optimize regional operations United has planned to replace its 50-seat jets with more fuel efficient 76-seat Embraer 175 aircraft. The 50-seat jets, that comprised 8% of total capacity, is estimated to reduce to 5% of total capacity by 2015. In addition to this United plans to reduce the number of regional partners in a particular hub and the number of hubs in which these partners operate to improve reliability.
If management is able to gain from the planned improvements in network, scheduling, cost restructuring, and margin improvement efforts it will result in a better valuation for the company.
Browse this series on Market Realist: