• United Airlines Holdings Inc. is on track to generate credit measures in line with our previous upside rating threshold this year, and we expect improvement in 2025.
• The company's financial risk profile has strengthened notably from positive free cash flow allocated toward debt reduction, which we believe could continue in 2025.
• In addition, United introduced a more conservative leverage target that we consider a commitment to future balance sheet strengthening.
• As a result, S&P Global Ratings upgraded United to 'BB' from 'BB-'. We also raised several of our issue-level ratings on the company's debt.
• The stable outlook reflects our expectation for the company to generate a funds from operations (FFO)-to-debt ratio in the low-30% area through 2025, as we assume continuing favorable passenger demand that underpins revenue growth and margin improvement.
S&P Global Ratings today took the rating actions listed above.
United's financial risk profile has improved.
The upgrade primarily reflects year-to-date strengthening in the company's leverage and coverage ratios, and our expectation for continued improvement in 2025. United is on track to generate earnings and cash flow that exceed our previous estimates and has meaningfully reduced net debt this year. In addition, we now expect the company to generate positive free cash flow in 2025 compared with our previous expectation for a deficit, which should lead to further strengthening in its balance sheet. Lastly, the company lowered its target leverage over the next few years to below 2x (as per the company's calculation), which indicates a greater willingness to reduce its prospective adjusted debt levels.
Recent and estimated credit measures are in line with our previous upside threshold.
We now expect United's FFO to debt to be about 30% in 2024 and higher in 2025, which is aligned with our previous upside threshold for the rating. We also expect its adjusted debt-to-EBITDA ratio to be just below 3x over this period. The anticipated improvement is only modestly stronger than our previous estimates, but we have greater conviction that stronger credit measures are sustainable at least through next year. In our view, this mainly reflects the downward revision to our capital expenditure (capex) estimate and our higher earnings estimates, which should lead to meaningful free cash flow generation.
Positive free cash flow provides financial flexibility.
The company is on track to exceed $2 billion in positive free cash flow generation this year, or over $1 billion above our previous estimates. Internally generated cash flow and cash on hand facilitated the decline in its reported debt by over $3.5 billion year-to-date through the third quarter of 2024. We now believe there is a downward bias to the company's $7 billion-$9 billion capex guidance range for 2025-2027, and we have lowered our previous estimate for 2025 by roughly $1 billion (from earlier this year). Protracted delays in the ramp-up of aircraft deliveries, notably at The Boeing Co., are mainly responsible, and the timing of an eventual recovery remains uncertain. We now assume United will generate over $1 billion in free cash flow next year, which incorporates our lower capex estimate.
The recent introduction of its share repurchase program was an unexpected development (authorized for up to US$1.5 billion). Presumably, future share buybacks will limit the extent of balance sheet improvement that we would otherwise have expected. However, we expect they will be funded with internally generated cash flow rather than cash or debt, consistent with United's more conservative leverage objective. We also believe the company would pause meaningful share buyback activity in the event of unexpected pressure on its earnings.
Earnings growth is expected to continue in 2025, with further margin expansion potential.
United is on track to generate earnings and cash flow modestly above our previous estimates this year, and we assume further growth in 2025. We continue to believe passenger travel demand will remain strong. and the company will expand its capacity. For now, we assume United's unit revenue will remain relatively stable but could re-assess in early 2025; subdued industry capacity expansion--particularly from the historically lower-cost airlines that continue to face earnings pressure--and continued growth in premium revenue, are notable source of upside to average fares. Higher revenue should more than offset modest operating cost inflation, and we now assume a lower fuel price for next year. The downward revision to our price assumption (to about $2.50 per gallon) mainly reflects S&P Global's new oil price forecasts, but we acknowledge prevailing jet fuel prices will remain highly speculative.
United is poised to continue to benefit from structural changes in passenger air travel.
We believe United is well positioned to benefit from continued above-average growth in demand for premium products, loyalty program utilization (MileagePlus), and international travel. The company generates the largest share of revenue from international travel relative to the network carriers (Delta Air Lines, American Airlines), with key coastal hubs in addition to its central hub in Chicago. We believe this affords increased opportunities to expand its business from higher-margin premium and loyalty sales. The shift in demand toward premium products appears structural and anecdotally supported by the recent strategic shift by several historically lower-cost airlines toward premium offerings. We believe United's established position, which including several seat classes beyond basic economy, is a competitive advantage.
Our rating also incorporates the potential volatility of earnings and credit measures.
Our rating continues to incorporate the potential for significant and unexpected volatility in earnings and cash flow linked to airline industry cyclicality and event risk. In our view, lower-than-expected earnings in tandem with higher prospective capex could become weaken the company's credit fundamentals beyond 2025. We estimate that minimal changes in our key assumptions such as passenger revenue per available seat mile (PRASM), available seat miles, and cost per available seat mile (CASM) can have an outsized impact on revenue and credit measures. We are less concerned with volatility, at least over the near term, mainly due its recent debt reduction, the downward revision to our capex assumption (which reduces the risk of cash outflows and higher adjusted debt) and lower leverage target. However, market conditions can change quickly and unexpectedly and limit or derail sustained improvement in United's operating results.
The stable outlook on United reflects our expectation for the company to generate modestly stronger credit measures through next year, including FFO to debt in the low-30% area. We assume the company will generate a modest improvement in earnings and cash flow in 2025, led by growth in passenger volumes and modestly higher operating margins. In our view, there is less financial risk facing the company than we previously considered, notably due to recent debt repayment and our expectation for positive free cash flow generation next year.
We could lower our issuer credit rating on United if, over the next 12 months, we estimate the company's FFO-to-debt ratio in the low- to mid-20% area on a sustained basis. In this scenario, we would expect the company to generate earnings and cash flow below our estimates, most likely due to weaker-than-expected demand for passenger travel that negatively affects average fares alongside higher unit costs. Higher adjusted debt, due to material free cash flow deficits related to future new aircraft expenditures, could also weaken credit measures.
We could raise our ratings on United if, over the next 12 months, we expected the company to generate improvement in its profitability to an extent that enhances our view of its business risk profile. This would likely include S&P Global Ratings-adjusted EBITDA margins sustained above 15%. We could also upgrade the company if we expected its FFO-to-debt ratio to be well above 30% on a sustained basis. In our view, this could result from earnings and cash flow growth that exceed our estimates through 2025, most likely due to stronger-than-expected passenger volumes and PRASM, or material debt reduction from free cash flow generation.
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