Last week, we downgraded our long-term recommendation on
United Continental Holdings Inc.
) from Outperform to Underperform based on concerns over travel
demand and pricing, which is expected to result in weak traffic
in the third quarter. The largest U.S. airline retains a Zacks #
5 (Strong Sell) Rank for the short term (1-3 months).
DELTA AIR LINES (DAL): Free Stock Analysis
SOUTHWEST AIR (LUV): Free Stock Analysis
UNITED CONT HLD (UAL): Free Stock Analysis
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The company delivered lackluster performance in the second
quarter, with earnings per share missing the Zacks Consensus
Estimate and below the year-ago earnings. The shift to a single
passenger service system and the new procedures related to
Continental merger actions took a toll on the demand for United
Continental's services in the second quarter, ensuing in higher
costs and revenue loss.
Despite the company's aggressive actions to improve
profitability, we believe surging fuel prices and the threat of
recession in Europe pose downside risks to the stock.
Additionally, high non-fuel costs related to fleet optimization
and product initiatives, high unionization, new regulations
related to advertising, competitive threats from major rivals -
Delta Air Lines Inc.
Southwest Airlines Co
), and risks pertaining to the successful Continental integration
could hurt the company's profitability going forward.
Further, the airline industry has been struggling with rising
fuel costs and economic uncertainties. In fact, the deepening
European debt crisis has affected almost all the key global
economies. In addition, weak travel demand is leading to lower
traffic and profits for the air carriers. As a result, the
earnings estimates for United have been trending downward over
the last three months on the back of numerous macroeconomic
The Zacks Consensus estimates for United went down by more than
50% to $1.45 for the third quarter and $2.35 for 2012 in the last
three months. Notably, the Zacks Consensus Estimates for the
third quarter and the fiscal year were $2.72 and $4.53,
respectively, three months back.