Here’s why United Airlines shares surged nearly 30% in September.

Shares in United Airlines (NASDAQ: UAL) they rose 29.6% in September, according to data provided by S&P Global Market Intelligence. The surprising increase is mainly due to the recovery from the strong sell-off in stocks during the spring and summer.

What was the market worried about?

The airline industry is known as highly cyclical, and for good reason. The traditional cycle works like this: Airlines like United Airlines see an increase in passenger numbers and an increase in load factor (seat load). They may increase ticket prices in response to high demand. As a result, they increase their ability to maximize profits in response to growing demand.

After a while, demand begins to weaken, leading to pressure on load factors and ultimately on prices and profitability. If airlines are not disciplined in cutting routes quickly, it could lead to a sharp decline in profitability.

The latter was a topic of market concern during the spring and summer, with airlines such as United Airlines talking about excess capacity in the industry. Additionally, investors were concerned about the potential lingering impact of the crisis Crowd blow update the event that caused flight delays and cancellations.

Which prompted a rally for help

However, the good news for the fall is that demand remained strong in the third quarter, while according to Delta Airlines and United Airlines management, the industry showed discipline by reducing capacity where necessary. Both management teams expected to pass the revenue per available passenger mile (RASM) turning point in August, and both did.

Given that RASM is a key indicator of pricing power, an improving RASM indicates an industry that does not suffer from overcapacity problems. This is a positive sign for United Airlines’ third-quarter earnings report, which is due in mid-October.

What’s next for United Airlines?

With interest rates at an all-time high and set to decline, discretionary consumer spending is likely to increase, which could be good news for airlines. What’s more, an improving global economy is good news for higher-earning business travelers because airlines like United and Delta are better equipped to serve them.

Image source: Getty Images.

Returning to valuations, United Airlines generated $9.80 in earnings per share in 2024 and will grow to $11.35 in 2025. While these numbers are uncertain, especially for an industry as cyclical as airlines, the latest news gives certainty about the numbers, which means United’s earnings in 2025 will be just under five times greater.

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Lee Samaha has no position in any of the companies mentioned. The Motley Fool holds positions on and recommends CrowdStrike. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.