Financial Analysis: United Airlines Holdings, Inc. Essay

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Table of Contents

Primary Business Activities and Background
Summarized News Items
Income Statement Analysis
Cash Flow Statement Analysis
Balance Sheet Analysis
Stockholders’ Equity Analysis
Ratio Analysis
Recommendations and Justification
References

Primary Business Activities and Background

United Airlines Holding, Inc., or United in short, traces its history back to the 1920s and pioneers of American aviation. United Aircraft and Transport Corporation (UATC), an official United’s predecessor, was established on March 28, 1931. However, Varney Airlines, one of the companies that merged into UATC, became operational in 1926 (Singh, 2021). Therefore, United can be considered the oldest commercial airline in the United States.

United has lived through several mergers and acquisitions to become one of the most prominent players in the U.S. market. According to Burgueño Salas (2022), the current United’s market share in the U.S. is 12,9%. The company’s main competitors are Delta Aie Lines, Southwest Airlines, and American Airlines, which leads the market with a 19,5% share (Burgueño Salas, 2022). In absolute numbers, United has a route network consisting of 322 destinations, 80 of which are international (United, 2021). The United fleet currently consists of 826 mainline and 517 regional aircraft (United, 2022b). Overall, the company remains a significant force in the industry, despite massive losses sustained throughout the COVID-19 pandemic.

Summarized News Items

Two news items presented in this section are directly connected to United’s relationships with investors. Firstly, the company issued first-quarter financial results and announced an expected return to profitability in the second quarter (United, 2022a). One can see that United compared the 2022 Q1 results to the first quarter of 2019, ignoring the troubled 2020 and 2021 financial years altogether. Secondly, United issued an investor update in which it expressed a plan to increase the mainline aircraft fleet to 878 units by the end of 2022 (United, 2022b). Overall, United’s official news reports are aimed to fill the investors with optimism and show that the company is on the path to post-pandemic recovery.

Income Statement Analysis

The income statement analysis shows the full scope of the COVID-19 pandemic’s drastic consequences. The 2019 financial year ended with an improvement in key categories. United finished that period with $43 billion in total revenue, $12 billion in gross profit, and 3,9 billion in pretax income. However, the 2020 year was a disaster, as total revenue plummeted by almost $28 billion, and $12 billion gross profit was followed by a $5 billion loss (Yahoo!Finance, 2022). Last year saw an improvement as the transportation industry slowly recovered from the devastating pandemic-related restrictions.

Nevertheless, it is too early to claim with complete confidence that United has left the dangerous territory. The company finished the 2021 financial year with a loss, and the numbers of successful 2019 will unlikely be reached in 2022. The gradual cancellation of restrictions offers United an opportunity to regain capacity. However, unfavorable global economic and political events may hinder the company’s recovery to pre-pandemic success.

Cash Flow Statement Analysis

A similar picture can be seen in United’s cash flow statement — successful 2018 and 2019 financial years were followed by the devastating 2020 and a certain recovery in 2021. Between 2018 and 2019, United enjoyed a 41,8% net income growth. The 2020 financial year ended with a colossal 334,93% net income loss compared to 2019. In 2021, United only managed to cut losses compared to 2020 (Wall Street Journal, 2022). Overall, one can see the trend for recovery, especially if United regains full flight capacity. However, the recovery speed may be affected by global economic and political conditions, as well as potential disruptions to the company’s regional network.

Balance Sheet Analysis

The balance sheet analysis provides certain reasons for cautious optimism. Despite the losses inflicted by the COVID-19 pandemic, United managed to increase its assets throughout the whole 2018-2021 period, from $53 billion in 2018 to $75 billion in 2021 (Wall Street Journal, 2022). Most importantly, the net property, plant, and equipment category remained at a consistent level, which means that United still has a large aircraft fleet at its disposal. Therefore, the company may improve other financial statements if international travel restrictions are not reintroduced. The 2020-2021 downfall was primarily associated with the restricted capacity factor, so elimination of the main obstacle would likely improve United’s financial health.

Stockholders’ Equity Analysis

Similar to income and cash flow statements, the stockholders’ equity statement was negatively affected by the global disruption of travel and transportation. For instance, United ended the 2019 financial year with an $11,5 billion balance, which was reduced to $5,9 billion by the end of the terrible 2020. The consequences of the COVID-19 disaster haunted the stockholders’ equity throughout the 2021 financial year, adding another $900 loss to the statement (EDGAR, 2022). However, these numbers are not as dismaying as they might look at first glance. United’s stockholders’ equity is still far from negative values, which means that the company is not under the threat of bankruptcy. Given the trend for recovery that can be seen in cash flow and income statements, United would likely improve its stockholders’ equity in the foreseeable future.

Ratio Analysis

Due to the fact that United’s recovery from the devastating 2020-2021 period is far from its finish, several financial ratios are currently looking unfavorable for potential investors. For instance, the return on equity (ROE) ratio of -41,79% looks particularly dire since it means that United still incurs losses. The negative return on assets (ROA) also correlates with the fact that United has yet to regain its former profitability (Macrotrends, 2022a). The 0,00 price/earnings ratio reflects the drastic fall of United’s share price since 2020 (Macrotrends, 2022b). Most importantly, the 8,24 debt-to-equity ratio means that investing in United in its current shape may be risky due to its high debt burden. Finally, both current and quick ratios border 1, which means that United has the ability to meet its obligations, but the margin of safety is relatively low (Macrotrends, 2022a). Therefore, investing in United is associated with potential risks, especially if the recovery trend meets unexpected obstacles.

Recommendations and Justification

The income, cash flow, and balance sheet statements show that United is slowly recovering from the disastrous 2020 financial year. However, the key financial ratios, such as ROE, ROA, price/earnings, and debt-to-equity, demonstrate that investment in United in its current shape poses certain risks and will not be profitable in the short run. Therefore, investment in United cannot be recommended under the current circumstances unless one firmly believes that the company will fully recover. In this case, one can consider United a potential long-term investment. Overall, a potential investor in United should be aware of risks and prepared to wait for an indefinite time.