United Airlines (UAL, Financial) reported robust 1Q25 earnings, surpassing expectations despite a noticeable dip in domestic travel demand. The airline's EPS was bolstered by a 9.2% rise in high-margin premium cabin revenue, outpacing Delta Airlines’ (DAL, Financial) 4% growth in the same segment. A significant 12.2% year-over-year drop in fuel expenses also contributed to the positive results. Encouragingly, UAL noted stable booking trends despite macroeconomic concerns, maintaining its FY25 EPS guidance at $11.50-$13.50.

In light of unpredictable macroeconomic conditions, UAL shared a recessionary scenario where operating revenue could decline by five points from 2Q25 to 4Q25. This scenario, combined with capacity reductions and no further fuel cost relief, would result in an FY25 EPS of $7.00-$9.00.

• Domestic business faced challenges in Q1, with revenue declining by 3.8%, a stark contrast to the previous quarter's 11% growth. UAL and competitors are observing weakness among price-sensitive customers, leading to capacity cuts, especially in off-peak flights.
• Despite domestic challenges, UAL's capacity rose by nearly 5% in Q1, outpacing DAL's 4.2% increase. International flights remained strong, with RASM increasing by 0.5% despite sluggish domestic demand. The Pacific region was a standout, with RASM up 8.5%, followed by the Atlantic at 4.7%.
• Starting 3Q25, UAL plans to reduce capacity, including a 4% cut in domestic capacity, to align supply with demand, thereby supporting pricing and margins. UAL's adjusted pre-tax margin improved to 3.6% in Q1, up from (0.6)% in the previous year.
• UAL aims to boost margins and profits by focusing on its premium business, particularly through enhancements in its Polaris business class. The new Polaris Plus suites feature sliding doors, spacious seats, and exclusive amenities. UAL is also investing in technology and customer experience, including faster WiFi via Starlink and new features on the United app.

UAL's 1Q25 results highlight its operational resilience and margin growth in challenging conditions, driven by strong premium and international demand. While optimistic for FY25 under stable demand, the company is cautiously managing capacity and planning for potential recessionary scenarios.