Here's Why Shares in United Airlines Took Off Today

Key Points

• The warning that a low-cost carrier could go out of business is good news for network carriers.

• United Airlines is well-positioned to outperform in the current environment.

• 10 stocks we like better than United Airlines ›

Shares in United Airlines (NASDAQ: UAL) had soared by 9.4% as of 1 p.m. ET today. It may seem odd that shares in network carriers like United are soaring after another airline, Spirit Airlines, released an SEC filing warning that it has doubts about being able to stay in business, but that's probably the reason for the surge in United and others like Delta and American Airlines.

What Spirit said and why it matters to United Airlines

Digging into the SEC filing, Spirit's management said "minimum liquidity covenants in the Company's debt obligations and credit card processing agreement require financial results to improve at a rate faster than what the Company is currently anticipating." This is a very worrying development and speaks to the distinct possibility of Spirit not surviving.

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That might be good news for United as it would reduce capacity in the domestic marketplace.

In addition, while low-cost carrier Spirit and United are not direct competitors, the low-cost fares from Spirit do pull down the ticket pricing in United's main cabin. If Spirit does go under, it would further validate the idea that the network carriers are simply better equipped, in the current environment, to deal with market conditions, as their pricing acts as more of a cushion to tolerate rising airport and labor costs.

Image source: Getty Images.

United and Delta are doing a great job of diversifying their revenue streams through focusing on premium cabin revenue, highly successful co-branded credit cards, and loyalty programs that engender repeat custom from high-income earners. It's a model that's working and cushioning the notorious cyclicality of their businesses.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.