United Airlines CEO Oscar Munoz was put squarely in the hot seat today, as analysts aggressively questioned him about management’s failure to get the company on a positive trajectory and deliver on results laid out in the 2016 Investor Day. At the time, Munoz painted a cautiously optimistic picture saying that in 2017 and 2018, United would slash capital expenditures by $1 billion and see an improvement in earnings of $4.8 billion by the year 2020. At the time, the Chief Executive enumerated plans to generate earnings growth by keeping a tighter reign on revenue and expanding different types of fare classes (called segmentation) to compete with discount carriers.
United Airlines has been trying to limit the activity of ultra-low-cost airlines like Spirit out of its major hubs. Over summer, analysts expressed concern that United could not absorb the impact of low fare matching with Spirit without severely eroding earnings and potentially sucking the whole industry into a fare war. More recently, the Street had been growing more optimistic about fare discounting. That is, until today.
United’s management fielded question after question from frustrated Wall Street analysts. Munoz and his team forecasted expanding capacity, an increase in unit cost and weaker Q4 unit revenue. Unit revenue is an important metric. It is the average revenue received per unit of available capacity; in layman’s terms, is used as a measure of how effectively management balances price and volume to generate revenue.
Unit costs are expected to increase in the fourth quarter between 2.5% to 3.5%, while capacity is expected to grow 3.5%. Pretax margin projections for Q4 are coming in below consensus at 3% to 5%. All of this is a major letdown for investors.
Yesterday, United put out a press release forecasting flat unit revenue projections for October and November and even a decline in December which typically sees an uptick because of holiday travel. UAL President Scott Kirby was quick to defend the December decline, saying that the slip is due to “vagaries of the calendar” since a lot of the holiday return traffic is pushed into January, Q1 2018. The grim projections prompted doubts about United’s ability to deliver bottom line results and resulted in the frenetic sell-off.
Amid the turmoil, Stifel analyst Joseph DeNardi posted a research note that stated, “Is This a Catalyst for Management Change?” In response, CEO Oscar Munoz urged investors to be patient and give the fairly new United management team a chance to recover losses. Munoz’ request apparently fell on deaf ears, as United shares tumbled 11% ending at 60.48 in afternoon trading while Spirit Airlines stocks also took a beating, retreating 3.8%. Other major carriers stayed relatively stable with Delta down 1%, Southwest Airlines 0.7% and American 1.6%.