United Airlines: Travel demand doesn't 'seem to be fully cracking' back to 2019 levels, analyst says

Scott Forbes, Jefferies Aerospace & Defense and Airlines Equity Research Senior Associate, joins Yahoo Finance Live to discuss Q1 earnings for United Airlines, the outlook for the airlines, and overall travel demand.

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SEANA SMITH: United Airlines reversing earlier losses after reporting fiscal first quarter earnings. Now shares trading to the upside, up just about 1.7%. Adjusted loss per share of $0.63 narrower than what the Street was expecting. Operating revenue up 51% year-over-year to $11.43 billion.

We want to bring in Scott Forbes, Jefferies aerospace and defense and airline's equity research senior associate. Scott, it's good to see you here. So just first, your take here on these numbers from United, a narrower than expected loss of revenue in line with the Street's expectations?

SCOTT FORBES: Yeah, I don't think they were going to be too many surprises today going into it, given they just updated their Q1 and Q2 guidance as recently as March. But generally, I think it's really just about executing on Q2 now. They've put out a revenue guide and I think it shows how strong summer demand is and how much leisure travel is really held up. And now you can just go out, execute on it, and make sure kind of investors are right.

But it's generally a good print. I think it's shown that demand is continued into the summer and costs are under control for both Q2 and for the full year, which I think is a little better than investor expectations.

DAVE BRIGGS: Certainly some questions on cost when it comes to the OPEC production cut. Any impact for United?

SCOTT FORBES: Well, I think in Q1, one of the big investor concerns was that their fuel guide was really, really aggressive, I'd say. And they've come out with a Q2 guide of $2.80 to $3, which compares to Spot Jet, right now at around $2.50. So it's fairly conservative. It gives them some room to work with.

There's obviously an impact from the OPEC production cut and the general rise in oil prices. But generally, I think this is better than where-- what investors expected.

SEANA SMITH: Scott, what are you seeing from your demand checks? Are we starting to see that picture crack at all?

SCOTT FORBES: I think slightly from where we were last summer. I mean, demand has been so strong. Leisure customers have been around 120% of 2019 levels. We've probably reached the peak. But relative to 2019, we're still 20% to 25% above where we were. So there's still a lot of room for strength.

Airlines still have a lot of room to run, and demand does not seem to be fully cracking back to where we were in 2019. It's still remaining fairly strong, even with some slight year over year declines.

SEANA SMITH: Scott, what about the fact that United is among the airlines that are going to be trimming flights at a couple of airports because the FAA requested it due to staffing shortages? Is that going to have a material impact, do you think at all, over the next two quarters?

SCOTT FORBES: Yeah, it'll likely have some impact on the capacity side. But the offset is-- the offset to that is really, whenever you have supply constraints across the industry, which is what we've seen through 2022 and 2023, where it's been pilots, it's been delayed deliveries, and now you're seeing air traffic control shortages. A lot of it just immediately gets offset by price. I mean, demand is still really strong. In any kind of supply shortages, any kind of supply constraints will likely be offset by higher prices. And the airlines are really, really able to kind of push that a little more in those areas where air traffic control shortages are being felt.

DAVE BRIGGS: Every airline is dealing with the pilot shortages and re-upping their collective bargaining agreements. Where is United and what's the impact?

SCOTT FORBES: Yeah, so United has baked in, probably, a 3-point unit cost impact for the new labor contracts for 2023. They haven't quite come to an agreement yet, but given Delta has already signed their collective bargaining agreement with their pilots, it's likely that both American and United kind of just move in line with Delta, which is what we've seen historically with these negotiations.

SEANA SMITH: And Scott, what about the international component of this? Because within this release, United did say that they are seeing growth in overseas flying that's really outpacing, it looks like, domestic flying. How big of an advantage or, I guess, does this position them in a better place than maybe some of their competitors out there?

SCOTT FORBES: Yeah, I think United is a little unique relative to the industry, which is when you saw Delta retire some of their larger triple sevens. You saw American retire some of their older widebody aircraft. United didn't retire any of them. So United's poised to come back into this market as international markets recover with a much larger widebody fleet than pre-pandemic. So you've seen them fly over the Atlantic at 20% to 25% more capacity than they did pre-pandemic.

Open markets like Mallorca and Bergen, that they've never had previously, to give them a try. And now you're seeing the Pacific start to open up in Osaka, Shanghai. A lot of those services restart, so it's definitely an area where United has a competitive advantage. And I'd say an area where given supply constraints across the industry that we've seen in the US, a lot of it's even worse in terms of retirements that we've seen in European airlines on the widebody side, with Lufthansa getting rid of, like, A380s and 747s, for example. So there's a lot of room to run there and a lot of yield upside to come internationally.

DAVE BRIGGS: And Scott, finally, the latest disaster for Southwest Airlines-- a ground stoppage earlier today, another glitch. The stock plummeted, since recovered to about level. How concerned should investors, let alone passengers, of Southwest be?

SCOTT FORBES: Yeah, well, the actual ground stoppage, in the end, only lasted around 12 to 15 minutes. So it's something that I don't think would have been too much news if it wasn't Southwest. I think we know Southwest needs to invest more in their technology. They're doing $1.3 billion of investment annually, which is up from their prior $1 billion a year. So it's something that we continue to watch. It's something that I think they're fully aware that they need to invest in, and it's just it's incidents like this that kind of reinforce that.

DAVE BRIGGS: Scott Forbes, thank you, sir. Appreciate that analysis.