United Airlines (NASDAQ: UAL) announced results that missed expectations.

Revenue came in at $10.88 billion, in-line with consensus of $10.88 billion but earnings per share of $2.53 missed the consensus estimate of $2.64 by 4%.

The company’s measure of adjusted EPS came in at $2.67/sh beating consensus by 1%. 

Full-year revenue was up 5% compared to 9% growth in 2018 over 2017, due to higher salaries and more spending on maintenance, likely due to the grounding of the Boeing 737 Max.

The stock is currently flat to slightly up after hours.

Investors won’t find much to get excited about in this release.  

United and other airline peers are still benefitting from the tailwind of lower fuel prices, with jet fuel prices down 7% compared to last year.

Fuel makes up 25% of these company’s expenses and can be a major driver of cashflow and stock price changes. 

Fuel Prices Down Another 7% over Last Year

Source: EIA

Even though airlines continue to benefit from growing consumer spending and low oil prices, the group is underperforming the consumer discretionary index by a wide margin.

United has been a rare bright spot outperforming everyone else in the last two years.

Airline Stocks Continue to Underperform the Index

Source: YCharts

Revenue growth for the group is slowing as the oil price tailwind dissipates, but United remains one of the fastest-growing airlines.

Source: YCharts

Looking at Airline P/E multiples, United trades at a significant discount to the group even though revenue growth has equalled or exceeded most peers.

Part of this is likely due to worse profitability, but taking a hit on margins lets United price their tickets competitively to peers and as a result, grow revenue and take market share.

Source: YCharts

What to Do with Airline Stocks

Any loss in oil supply could cause a spike in price and take the wind out of any airline stock rally.

With oil prices unlikely to go much lower in 2020, but consumer spending on the rise, we think airline stocks will go up with the market, but continue to underperform higher growth tech stocks and the consumer discretionary index as a whole. 

This is a cyclical industry and we are deep into a 10+ year economic expansion.

Not to mention geopolitical concerns, where any loss in oil supply could cause a spike in price and take the wind out of any airline stock rally.

You should own airlines at the tail end of an economic recession, not at the end of an economic boom.

This historical chart tells the whole story.

Airline Stocks Rebound Hard After Recessions (Especially United)

Source: YCharts

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