Goldman Sachs Group, Inc. is bullish on United Airlines Holdings, Inc. (UAL.US) for another 50% upside: growth momentum is expected to continue, fuel costs weigh, but profitability remains industry-leading.

Goldman Sachs Group, Inc. noted that United Airlines Holdings, Inc. (UAL.US) reported third-quarter results in line with expectations. On guidance, the company provided fourth-quarter earnings per share guidance below market consensus expectations due to higher aviation fuel prices, but fourth-quarter revenue guidance was above expectations. On Wednesday, United Airlines Holdings, Inc. shares closed up 4%, outperforming the other stocks in Goldman Sachs Group, Inc.'s coverage universe excluding this stock, and also outperforming the S&P 500 Index, which rose about 0.5%. Goldman Sachs Group, Inc. believes the main driver of United Airlines Holdings, Inc.'s outperformance on Wednesday was the company's better-than-expected fourth-quarter revenue guidance. The company expects fourth-quarter unit revenue (RASM) growth to accelerate, whereas Goldman Sachs Group, Inc. had previously forecast RASM growth to decelerate. According to the bank's recent conversations with investors, investors also generally expected RASM growth to decelerate ahead of the earnings release. Given the sharp rise in aviation fuel prices over the past few months, Goldman Sachs Group, Inc. was also encouraged by management's statement that it is willing to make some trade-offs on load factor to improve yields and ensure revenue covers fuel costs, as this approach helps maximize RASM and margins. Management also said it will continue to take relevant measures if further capacity adjustments are necessary. Growth momentum is expected to continue. Corporate travel demand trends close to departure dates remain strong, international route RASM growth is expected to accelerate, and several previously underperforming markets are also expected to improve. Although Goldman Sachs Group, Inc. expects that elevated aviation fuel prices for an extended period will delay United Airlines' goal of achieving a double-digit margin in 2027, the bank expects the company will remain one of the most profitable airlines in the industry. Goldman Sachs Group, Inc. has a "Buy" rating on United Airlines Holdings, Inc. and adjusted its target price to $152, implying about 50% potential upside from the current share price. Double-digit pretax margin target Management noted that achieving a double-digit pretax margin in 2027 will be challenging because aviation fuel prices are expected to remain elevated and industry capacity may accelerate. United Airlines' own initiatives are expected to drive RASM improvement, including gaining more market share as the Starlink service continues to roll out, but these measures alone may not be sufficient to achieve the target. Management emphasized that, in addition to United Airlines' own growth drivers, achieving this target in 2027 may require favorable changes in at least one of the following three additional factors: lower fuel prices, lower industry capacity, or continued industry-wide willingness to sacrifice load factor to improve yields. Cost outlook United Airlines reported third-quarter unit cost (excluding fuel, CASM ex-fuel) up 7.8% year over year, better than the 8.0% market consensus expectation and Goldman Sachs Group, Inc.'s 8.3% expectation ahead of the earnings release. Management expects the third quarter will be the peak for CASM ex-fuel growth, with growth slowing in the fourth quarter and falling significantly in 2027. The company noted that the higher third-quarter cost increase reflected the full cost impact of the flight attendant labor agreement and the impact of capacity cuts close to departure dates. Excluding the adverse impact of the latter, third-quarter CASM ex-fuel was broadly in line with expectations at the start of the year. Looking ahead to 2027, management continues to target its long-term CASM ex-fuel framework of 2% to 3% growth per year. Among the favorable factors, larger aircraft seat specifications will help partially offset inflationary pressures, including pressure from higher distribution costs and airport costs. Management noted that achieving this cost target next year will still require effort. Management also emphasized that if cutting capacity below the original plan would maximize margins, even if it puts upward pressure on CASM ex-fuel, the team will always prioritize managing margins rather than simply seeking to control CASM ex-fuel. Revenue drivers Management noted that in the third quarter, unit revenue (RASM) performance in Central America, the Caribbean, Florida (Florida RASM up 26% year over year), Newark, and London was relatively stronger than the rest of the network; Hawaii, the South Pacific, and Chicago were relatively lagging. For underperforming markets, management said it expects trends in the Hawaii market to improve in the fourth quarter; starting in April 2027, because Federal Aviation Administration (FAA) restrictions on Chicago O'Hare Airport will constrain capacity, trends in the Chicago market are expected to shift from a drag to a driver. United Airlines expects that, beginning in the second quarter of 2027, domestic airline industry capacity growth in the Chicago O'Hare market will be very limited. Corporate travel demand remains strong. Total corporate business revenue grew 22%, including a 15% increase in yield and about a 1 percentage point increase in load factor. Revenue from contracted corporate customers rose even more, up 26% year over year. Looking ahead, management expects another strong performance in business travel in the fourth quarter. Management noted that there is still room for improvement in corporate travel's contribution to load factor, as this metric remains 4 to 5 percentage points below 2019 levels. 2027 capacity outlook Although management has not yet formally provided 2027 capacity guidance, it has provided some information on the key drivers of future capacity growth. The company expects to take delivery of 24 widebody aircraft and 100 narrowbody aircraft in 2027, including the larger-fuselage MAX 10 model. Management expects larger aircraft seat specifications to be one of the factors driving capacity growth in 2027. Management also expects premium cabin capacity growth to outpace economy cabin capacity in 2027. As for which parts of the network will be growth priorities, with United Airlines' "United Next" plan's connectivity goals around central U.S. Hub Group, Inc. Class A airports expected to be largely completed by summer 2027, management plans to shift focus to coastal Hub Group, Inc. Class A airports and growth opportunities in the international network. Balance sheet United Airlines ended the third quarter with $17.7 billion in liquidity and repaid about $1 billion of debt during the quarter. The company also issued $900 million of debt at a fixed-rate equivalent financing cost in the low-5% range; at the same time, it expanded its revolving credit facility from $3 billion to $5 billion, increasing available liquidity. The company aims to maintain liquidity at $18 billion by the end of fiscal 2026. The expanded revolving credit facility is expected to save about $70 million per year in interest and fees; if the management team chose to raise additional liquidity through other means, the cost could be higher while maintaining the same liquidity level. Management noted that the increase in liquidity should not be viewed as creating more optionality for M&A, but rather as relatively low-cost insurance purchased against a volatile fuel price environment. At the end of the third quarter, the company's net leverage ratio was 2.4x. Management reiterated that it will continue to target a net leverage ratio below 2x and remains committed to achieving the financial metrics required for an investment-grade credit rating in 2027. Outlook, valuation and risks Goldman Sachs Group, Inc. slightly lowered its fourth-quarter earnings per share forecast for United Airlines Holdings, Inc. to $1.00 from $1.02 previously (FactSet market consensus expectation of $1.72); it lowered its 2026 earnings per share forecast to $6.73 from $6.75 previously (market consensus expectation of $7.85). The revisions reflect the latest impact of higher fuel prices, partially offset by better-than-expected revenue trends. Goldman Sachs Group, Inc. lowered its fiscal 2027 earnings per share forecast to $9.75 from $11.30 previously (market consensus expectation of $12.58), and lowered its fiscal 2028 earnings per share forecast to $13.35 from $15.45 previously (market consensus expectation of $17.61). These revisions also incorporate the impact of higher fuel prices while rebasing forecasts on better revenue trends. Goldman Sachs Group, Inc. lowered its 12-month target price to $152 from $160 previously, due to the bank's revised share count forecast and a reduction in its target enterprise value to EBITDA (EV/EBITDAR) multiple to 4.9x from 5.0x previously, reflecting rising GEO Group Inc political risk driving elevated aviation fuel prices. Key downside risks include: competitors responding to United Airlines' growth plans, thereby eroding the benefits of network restructuring; further delays in aircraft delivery schedules; and a stall in the currently observed corporate travel recovery momentumUnited Airlines Holdings, Inc. has a higher dependence on this revenue source than peers.