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Morgan Stanley Research Report On UAL | Megaconstellations & Satellite Fallout | Boeing Appoints Brian West | Other News

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Morgan Stanley Research: United Airlines

UAL’s analyst day outlined the company’s plan to catch up to peers on fleet age and gauge by placing the largest aircraft order in its history. 2026 financial targets look constructive but they may seem a long way off to airline investors right now and supply concerns may start brewing.

UAL is preparing for a post-pandemic airline industry by placing the largest aircraft order in its history. The order for 270 planes (200 Boeing 737 MAX 10 and 70 Airbus A321 neo) will join the fleet between 2023 and 2026. They will largely replace the company’s small, inefficient 50-seater regional aircraft that has been a drag on profitability at its US Domestic coastal and mid-continent hubs. The net result of the replacement will be a ~30% increase in gauge (or number of seats per aircraft) on those routes. Mgmt. also issued LT (2026) financial guidance including ASM growth of 4-6% CAGR, TRASM 1% below 2019, CASMxF 8% lower than 2019, EBITDA margin of ~16.0% in 2023 and ~20.0% in 2026 (vs. 15.7% in 2019), adjusted pre-tax margin ~9.0% in 2023 and ~14.0% in 2026 (vs. 9.4% in 2019) as well as 2026 net debt slightly below 2019 levels.

Morgan Stanley believes UAL is doing absolutely the right thing…but that does not mean that the path is not going to be tricky/painful. This is a bold move from UAL – a little over a year removed from sliding into the chair, CEO Scott Kirby made the second decisive offensive move of his tenure (the first being permanently eliminating change fees in Aug 2020). While there is likely never going to be a “good” time for an airline to spend ~$40 bn on capex to buy 270 planes (20% of total current fleet) over a 5 year period, MS believes now is probably the best time to do it. Near-term macro risk appears relatively low, there is a lot of pent up demand with a strong consumer, the balance sheet is still carrying excess (gross) liquidity, the fleet renewal will drive operating cost savings (esp. if fuel continues to rise), new planes are cheap (and so is money) and the new capacity could help drive share gains (or at least defend vs. peers). MS believes it may have been too late to start catching up to peers on the aging fleet if UAL waited until the balance sheet was normalized 3-4 years from now. The biggest question on investors’ minds is likely to be – this is a big capacity increase…what happens if it doesn’t go according to plan? In the event of a macro recession or new black swan event, mgmt. has a Plan B. “Only” 84 of the 270 plane order is committed by 2023, with the rest coming 2024-26. Mgmt. believes that it has plenty of flexibility with the 2024+ orders to avoid putting pressure on capacity/TRASM and has the option to accelerate retirements as well.

MS remains EW. Morgan Stanley (MS) continues to remain bullish on the pace of the traffic recovery in US Domestic and they believe Corporate and International will catch up and normalize by late 2021/early as well. This rising tide will lift all boats including the Legacies/UAL esp. as International and Corporate comes back. Add in structural cost savings, a manageable fuel price environment, potential for deleveraging and investor sentiment that still appears to be subdued/out-of-favor and we think the setup at UAL is quite favorable. There is no doubt that with this past week’s announcement the company is clearly all-in betting on a recovery – particularly in corporate – which MS agrees with and think is the right move but the market may remain skeptical for some time and continue to gravitate toward LCC/ULCC stories that do not have as much corporate/international and balance sheet risk for now.

What does this mean for the industry? The announcement likely has something for both the bulls and the bears. Bulls will like the bold decision that shows that the airlines are coming out of the shadow of the pandemic and see blue skies ahead. The decision also makes financial sense in that UAL could not have put off this decision for much longer and will likely see operating cost, efficiency and market share gains from this. Investors should also be glad that a Legacy is going up toward a premium product instead of initiating an industry race to the bottom on price. Bears, on the other hand, will point out the ~30% increase in capacity which together with all the other capacity increases we have seen from the LCCs/ULCCs so far is likely to drive a lot more capacity in the 2023-24 timeframe, which will bring inevitable pressure on pricing. For now, we believe the bull arguments are more tangible and measurable than the bear arguments, but will keep a close eye on developments.

Model and PT. UAL’s 2023 and 2026 guidance comes in mostly consistent with MSe on TRASM, CASMxF and margins but is approx. 10% higher than us on ASMs. This is a bit of a surprise given MS’s bullish views (and numbers) on a traffic rebound vs. the street. MS updated FY22/23 EPS goes to $5.57/$10.72 from $4.18/$9.82 prior largely driven by the higher ASMs. However, our PT remains unchanged at $70 as the higher capex is a drag on our DCF. Our PT is ~33% above the current stock price – this is good upside but about mid-pack within the Airlines coverage and we see risk-reward as balanced, which keeps us EW.

What does this mean for the industry? The announcement likely has something for both the bulls and the bears. Bulls will like the bold decision that shows that the airlines are coming out of the shadow of the pandemic and see blue skies ahead. The decision also makes financial sense in that UAL could not have put off this decision for much longer and will likely see operating cost, efficiency and market share gains from this. Investors should also be glad that a Legacy is going up toward a premium product instead of initiating an industry race to the bottom on price. Bears, on the other hand, will point out the ~30% increase in capacity which together with all the other capacity increases MS has seen from the LCCs/ULCCs so far is likely to drive a lot more capacity in the 2023-24 timeframe, which will bring inevitable pressure on pricing. For now, MS believes the bull arguments are more tangible and measurable than the bear arguments, but will keep a close eye on developments.

MEGACONSTELLATIONS & SATELLITE FALLOUT

One of our readers sent us some stories on what he called an “eye opener” batch on plans to launch an unimaginable number of satellites potentially causing a real headache for everybody…including flying aircraft. Here are a few comments from the first article we thought painted a picture of the issue: “The problem is that there are now plans to launch about 55,000 satellites,” Boley said. “Starlink second generation could consist of up to 30,000 satellites, then you have Starnet, which is China’s response to Starlink, Amazon’s Kuiper, OneWeb. That could lead to unprecedented changes to the Earth’s upper atmosphere.” Further, “Megaconstellation operators, inspired by the consumer technology model, expect fast development of new satellites and frequent replacement, thus the high amount of satellites expected to be burning in the atmosphere on a daily basis.” Not everybody, especially astronomers and folks in the space community were too happy: “However, earlier this year, the International Astronomical Union asked a specialized United Nations’ committee to protect the pristine night sky against light pollution from megaconstellations.” We included below some of the articles/links about issues, but note, the rapid and multiple satellite fallouts will no doubt affect the sky visibility…not to mention aircraft flights. See if you agree.

BOEING

The Boeing Company named Brian West as the company’s executive vice president and chief financial officer effective August 27, 2021. In this role, West will lead all aspects of Boeing’s financial strategy, performance, reporting and long-range business planning, as well as investor relations, treasury, controller, and audit operations. West will also oversee the company’s business transformation efforts and will have executive responsibility for the company’s global financing arm, Boeing Capital Corporation. He will report to Boeing President and CEO David Calhoun and will serve on the company’s Executive Council. “Brian is the ideal executive to serve as Boeing’s next CFO given his significant financial management and long-term strategic planning experience in complex global organizations across the aerospace, manufacturing and services industries,” said Calhoun. “I have had the pleasure of working with Brian previously, and he is an exceptional leader whose broad operational expertise and commitment to transparency with stakeholders will advance our efforts as we continue our focus on safety and quality, improving our performance and transforming our company for the future.”

West joins Boeing following a successful and diverse career in senior financial and operational roles spanning several industries, including aerospace, manufacturing, infrastructure, healthcare, global information services, financial and risk management. He has served as the chief financial officer of Refinitiv since 2018, and was previously CFO and executive vice president of Operations for Oscar Health Insurance and CFO and COO of Nielsen. Prior to Nielsen, West spent 16 years at General Electric, where he served as CFO of GE Aviation and CFO of GE Engine Services. His additional finance leadership positions in GE businesses encompassed plastics, transportation and energy.

West is a founding board member of a Connecticut-based nonprofit organization whose mission is to prepare the next generation of diverse female leaders with the skills, community and connections to thrive in the world. He previously was a board member of Future 5, an organization that helps under-resourced students in Stamford, CT reach their full potential. West holds a bachelor’s degree in Finance from Siena College and a Master’s in Business Administration from the Columbia Business School.

West succeeds Greg Smith, who previously announced his plans to retire, effective in early July. The company has named Dave Dohnalek, currently Boeing’s senior vice president and Treasurer, to the role of interim CFO until West joins the company in late August.

Also, Boeing names Stayce Harris, former U.S. Air Force inspector general and longtime United Airlines pilot, to its board.

OTHER NEWS

Posted by on Tuesday, July 6, 2021 at 9:21 pm 
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