Why United Airlines' Resilience and Growth Are Underappreciated by the Market

The market's skepticism toward United Airlines (UAL) appears misplaced. Despite a macroeconomic backdrop of rising interest rates and slowing consumer spending, United delivered its strongest first-quarter financial results in five years, proving its ability to navigate uncertainty while executing a strategic transformation. With record revenue, robust free cash flow, and disciplined capacity management, UAL is poised to outperform peers in a softening economy—yet its shares trade at just 6x forward earnings, a valuation that overlooks its structural strengths. This article argues that UAL is a compelling buy, offering a rare blend of operational resilience, margin upside, and defensive attributes.

Operational Execution: The Foundation of Resilience

United's Q1 2025 results underscore its operational mastery. The airline flew its largest schedule in history, averaging over 450,000 daily passengers, while achieving its best on-time performance since 2021. Seat cancellation rates were halved year-over-year, a critical victory in an industry still recovering from post-pandemic volatility.

The United Next strategy—which prioritizes brand loyalty, premium travel, and cost discipline—is central to this progress. By reducing domestic capacity by 4% starting in Q3 and retiring 21 aircraft early, United is aligning supply with demand while focusing on higher-margin segments like international routes. Atlantic and Pacific RASM rose 4.7% and 8.5%, respectively, reflecting the airline's shift toward premium and long-haul travel, which carry stronger pricing power.

Margin Expansion: A Story of Discipline and Diversification

United's 3.6% pre-tax margin in Q1 2025, paired with $2.3 billion in free cash flow, signals a durable earnings model. While margin growth may seem modest, it emerges from a landscape where legacy carriers often struggle to balance growth and profitability. Key drivers include:

• Premium revenue growth: Business and premium cabin revenue surged 7.4% and 9.2%, respectively, outpacing the broader economy.
• Diversified revenue streams: Cargo and loyalty programs grew 9.7% and 9.4%, demonstrating the value of non-passenger income.
• Cost control: Even as fuel prices remain elevated, United's operational efficiency—driven by route optimization and fleet modernization—has mitigated pressure.

The data shows a clear upward trajectory: FCF has more than doubled over three years, while revenue growth has stayed consistent despite macro headwinds. This resilience suggests UAL's margins could expand further as it scales its premium offerings and prunes low-margin routes.

Macroeconomic Resilience: Positioning for a Softening Economy

Critics argue that UAL's success hinges on sustained travel demand. Yet the airline's strategy is designed to thrive in both boom and bust. Key defensive traits include:
1. Premium customer loyalty: The 10% rise in Net Promoter Scores and 17% growth in premium bookings reflect a deepening relationship with high-value travelers, who are less sensitive to economic downturns.
2. International exposure: With 5% growth in international bookings and record cargo performance, UAL benefits from global connectivity, which is less cyclical than domestic leisure travel.
3. Liquid balance sheet: $18.3 billion in liquidity and a 2.0x net leverage ratio provide a buffer against shocks, while $451 million in share repurchases signal confidence in its capital allocation.

Valuation: A Mispriced Opportunity

At a forward P/E of 6x, UAL trades at a discount to its peers and historical averages. For context, Delta Air Lines (DAL) and American Airlines (AAL) trade at 8.5x and 10.2x, respectively, despite weaker operational performance. UAL's current valuation implies a 50% downside to its pre-pandemic 2019 levels—a disconnect given its superior margins, cash flow, and strategic execution.

Investors should consider three catalysts:
- Starlink WiFi rollout: FAA-certified in-flight connectivity, free for MileagePlus members, could boost customer satisfaction and ancillary revenue further.
- 2025 capacity discipline: Reduced domestic flying will stabilize yields without sacrificing growth in premium and international markets.
- Debt reduction: With $5 billion in trailing FCF, UAL could lower its $27.7 billion debt burden, improving its credit profile and unlocking further shareholder returns.

Conclusion: A Buy at 6x Earnings

The market's focus on macroeconomic risks has overshadowed UAL's operational and strategic progress. By emphasizing premium travel, pruning low-margin capacity, and generating robust FCF, United has built a business model that is both defensive and growth-oriented. At 6x forward earnings—a valuation that reflects 2009-like pessimism—the stock offers asymmetric upside. For investors seeking a leveraged play on travel recovery and a resilient airline leader, UAL is a rare value proposition.

Investment thesis: Buy UAL at current levels; target price $60 (10x 2025 EPS estimates). Risk: A severe global recession or prolonged fuel price spike could pressure margins.