To The Moon

$American Airlines(AAL)$ $United Continental(UAL)$

In this analysis, we’ll take a deep dive into United Airlines (NASDAQ: UAL) stock to determine whether it’s a buy, hold, or sell at today’s prices. We’ll break the evaluation down into three core sections:

1. The three biggest risks United is facing right now

2. A detailed update to my proprietary discounted cash flow (DCF) valuation

3. My investment verdict based on the company’s performance across my six-step investing framework

Airlines are one of the most difficult sectors for long-term investors. While they can look cheap on traditional metrics, they often remain structurally challenged due to external volatility and internal constraints. United Airlines is no exception.

Macroeconomic Uncertainty and Recession Sensitivity

United Airlines is a cyclical business—one that’s extremely sensitive to economic cycles. As discretionary income shrinks during economic downturns, both leisure and business travel tend to be cut. Airlines, which operate on thin margins in the best of times, can quickly fall into unprofitability during slowdowns.

The company has already accounted for this in its 2025 guidance. It provided two sets of projections:

• Base Case (Stable Economy): $12.50 in earnings per share (EPS)

• Recession Scenario: EPS between $7 and $9

That’s a drop of nearly 36% at the midpoint, which is a substantial earnings contraction. What’s important here is not just the size of the drop, but the message: United expects a downturn is possible, and that its business would be severely affected.

Unlike some businesses that can diversify or pivot during downturns, airlines are largely stuck. Aircraft have to keep flying to earn revenue. Idle planes are expensive liabilities, and grounding fleets during recessions simply spreads fixed costs across fewer passengers. That spells pressure on both profitability and return on capital.

Labor Relations and Workforce Instability

The airline industry has a long and painful history of labor disputes, and in 2024, the tension flared up again. Nearly 100% of United Airlines’ flight attendants voted to authorize a strike—a clear signal of dissatisfaction and potential disruption.

This issue extends beyond flight attendants. Maintenance crews, pilots, gate agents, and baggage handlers are all unionized labor forces in this sector. Many of them are now actively negotiating for higher pay, better scheduling, and improved job security. This is happening at a time when airlines are still recovering from post-COVID debt burdens and capacity constraints.

Why does this matter so much to investors?

• First, labor costs make up 20–30% of an airline’s operating expenses. Any upward shift significantly impacts margins.

• Second, airlines have limited pricing power—they can’t always pass higher costs on to customers, especially in highly competitive routes.

• Third, even the threat of a strike can damage bookings and brand reputation.

Perhaps most importantly, this risk is persistent. It’s not a one-time event. Every few years, contracts expire and renegotiations begin again. When labor has more leverage than management—as is often the case in this industry—the result is chronically tight margins.

Fuel Price Volatility

Jet fuel is the largest variable expense for most airlines, and United is no exception. Fluctuations in fuel prices—driven by global supply chains, geopolitical instability, and OPEC decisions—can cause wide swings in airline profitability.

Yes, United and other carriers use fuel hedging contracts to manage this risk, but those hedges are temporary. For example, United might lock in a price of $80/barrel for the next 12 months, but if oil spikes to $110 when those contracts roll off, United suddenly faces margin pressure.

This problem is made worse by how far in advance airlines have to plan. Flights for next summer are often priced today, but no one knows what fuel will cost by then. This creates a mismatch between cost certainty and revenue certainty—a dangerous combination.

Moreover, hedging isn’t free. Locking in prices often means paying a premium, and if prices drop unexpectedly, the airline can end up worse off than if they hadn’t hedged at all. In other words, fuel risk is mitigated, not eliminated—and the market knows this.

Valuation: What Is United Airlines Actually Worth?

With all of these risks in mind, the natural question becomes: Is the stock cheap enough to compensate for them?

To answer that, I updated my discounted cash flow (DCF) valuation model to reflect United's new guidance, adjusted margins, and risk profile. My model estimates the fair value of United Airlines at $58.49 per share.

With the current stock price around $66.67, the company is trading above intrinsic value, though not by much. This puts it in the category of “fairly valued,” in my view.

To double-check, I also pulled United’s forward price-to-earnings (P/E) ratio using data from Finthat.io. The forward P/E is 6.34.

That sounds cheap, right?

Not really. Airline stocks have historically traded at very low multiples—and for good reason. These businesses are volatile, capital-intensive, cyclical, and structurally disadvantaged by union pressure, fuel dependence, and thin margins. A 6.3x forward P/E is normal for an airline—it doesn’t indicate a bargain.

My Investing Framework: Why United Scores Poorly

I analyze every stock through a six-step investing framework, which I’ve detailed extensively in my research and in my book. The framework includes:

1. Business Quality

2. Financial Health

3. Moat or Competitive Advantage

4. Management & Incentives

5. Macro Tailwinds or Headwinds

6. Valuation

Here’s how United Airlines performs:

• ✅ Valuation: Reasonable on both DCF and P/E metrics

• ❌ Business Quality: Poor—low returns on capital, cyclical revenues

• ❌ Financial Health: High debt from the pandemic era remains a burden

• ❌ Moat: Little pricing power or differentiation beyond hub dominance

• ❌ Management: Limited control over costs; beholden to external forces

• ❌ Macro: Facing headwinds from fuel, labor, and economic uncertainty

5 out of 6 categories score poorly—which is a red flag for long-term investors. While the valuation is acceptable, I don’t invest based on valuation alone. I want great businesses at fair prices—not structurally challenged businesses at slightly discounted ones.

Final Verdict: Hold — Not a Buy

To sum it up:

• United Airlines is fairly valued based on my DCF and forward P/E analysis

• But the company is structurally weak, with risks that aren't going away

• It scores poorly on 5 of 6 categories in my investing framework

• Therefore, I rate United Airlines as a Hold

If you already own the stock, it may make sense to hold it while watching for changes in fuel prices, labor dynamics, and macro data. But I would not initiate a new position unless the stock became significantly undervalued—well below my intrinsic value estimate—to justify the risk.

Airlines may look cheap on the surface, but investors should remember: not all cheap stocks are bargains.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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