United Airlines is Thursday's IBD Stock Of The Day as the best-performing major commercial airline stock taxis toward a buy point. Multiple factors have aligned to fuel UAL stock, including strong travel demand at home and overseas, along with shortages of pilots and aircraft that have leveled the playing field with low-price competitors.
What Pilot Shortage Means For UAL
On Wednesday morning, Delta Air Lines pilots ratified a new labor contract. The deal will provide a 34% pay hike over four years, slightly more than the company proposed. The contract also offers better vacation, work rules and 401(k) contributions. It is expected to serve as a template for United's negotiation with its pilots.
While compensation costs will rise industrywide, the impact isn't necessarily negative for major airlines like United and Delta. First of all, the pilot shortage is expected to last for several years. That means lower-paying low-cost carriers may have trouble retaining enough pilots to fly their same schedules, United CEO Scott Kirby said on the Jan. 18 earnings call.
"Cost convergence (is) already happening and I'm pretty sure it's going to continue," Kirby said.
Pilots aren't the only constraint. Factoring in air-traffic-control challenges, "We need 10% more pilots and 5% more aircraft to produce the same number of pre-pandemic ASMs (available seat miles)."
The combination of industry capacity constraints and strong demand means "margins across the board are going to be higher in the airline industry," he said.
'Tremendous Demand' For Air Travel
"You've got tremendous demand that is going to exceed 2019 levels," Michael Leskinen, a top United Airlines investor relations official, told a Feb. 23 Barclays investment conference.
Leskinen led airlines research at J.P. Morgan Asset Management before joining the company five years ago. He said that in the 23 years he's been involved in the industry, "we have never had a better setup."
In recent weeks, business-travel demand has reached 97% of 2019 levels. Leisure demand is at 130% of 2019 levels, he says. He sees remote work as a key contributor.
More travel is "the new normal, unless there's a backlash and we all decide we need to get back in the office."
In the Q4 earnings call, United Airlines executive Andrew Nocella said that "incredibly strong" international travel demand may produce record profits and margins across its global network.
UAL Stock
UAL stock added 0.1% to 52.44 in Thursday afternoon's stock market action. Still, UAL stock is just below a 53.36 buy point from a flat base, 10 cents above its Jan. 18 high.
The consolidation since Jan. 18 could be seen as a handle to a longer consolidation going back to 2021.
UAL stock has a 93 Relative Strength Rating. That meaning it's outperformed 93% of stocks over the past 12 months. That's tops among the Transportation-Airline group, except for Mesa Air Group, a regional operator.
UAL stock's relative strength line, the blue line in IBD charts that tracks a stock's progress vs. the S&P 500, is at a 52-week high, confirming its market leadership.
The flagship IBD 50 list of leading stocks includes UAL and a number of other travel plays.
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