United’s Fuel Test: Can Demand Outrun $100 Oil?

Grant Calloway

Welcome to the Bull Sheet. It's Wednesday, October 21st, the clock says before seven in the morning out west, and the opening bell is still a little ways off. Yesterday I told you United Airlines would be the litmus test for whether a hundred dollar oil price turns into real margin pain. Well, the results are in, and the test came back positive. Not the good kind of positive.

Grant Calloway

Here's the headline. United reported record third quarter revenue of $17.88 billion, up 17.4% from a year ago. Planes are full, and the premium cabins are humming. Unit revenue, that's TRASM, was up 15.9%. But the fuel bill ate the party. Aircraft fuel expense jumped 61.6% to $4.84 billion, an average of $3.90 a gallon, which is up $1.8 billion from last year. Adjusted earnings came in at $2.54 a share, a few cents shy of the roughly $2.59 the Street was looking for.

Grant Calloway

But the quarter that's over isn't what has the stock sliding. It's the guide. United cut its fourth quarter adjusted earnings outlook to a range of fifty cents to a dollar fifty a share. That's a wide range, and a low one. And when you give a range that wide, you're telling the market you don't know where oil lands either.

Grant Calloway

CEO Scott Kirby told CNBC this morning that the stress from higher oil prices is increasing. Now, in July the company said it expected to recover most of its fuel increase through fares by the fourth quarter. The market is now asking how far a ticket price can climb before a customer stays home. Demand is strong today, but a fare can only stretch so far. United is the first domino, and we'll hear more on its call at 10:30 Eastern.

Grant Calloway

Now the tape. Futures are pointing higher. S&P 500 futures are up somewhere between three tenths and a half a percent, Nasdaq 100 futures are up roughly two thirds of a percent to a full percent, and Dow futures are up about two tenths, call it ninety to a hundred points. The Russell 2000 is lagging a bit, and that tells you borrowing costs are still biting the little guys. For the record, yesterday the Dow gained 529 points to close at 52,495, led by 3M and the defense names, while the Nasdaq Composite finished flat.

Grant Calloway

Overseas, Asia bounced hard after Tuesday's selloff. South Korea's Kospi surged 3.29% to 5,735. A five percent jump in the Kospi 200 futures tripped an exchange sidecar, which paused program trading for five minutes. SK Hynix gained 6.4%, Samsung 5%. Japan's Nikkei added 0.85%, even though September exports badly missed, up 16.7% against the 20.1% economists expected. Hong Kong's Hang Seng fell 0.92% on soft mainland data.

Grant Calloway

Europe is up about one percent on the Stoxx 600, the DAX leading at 1.4%. But UK inflation accelerated to 3.5% in September, hotter than expected and the highest in a year, driven by motor fuels. That keeps a Bank of England hike on the table for November. And in France, Carrefour dropped more than ten percent after cutting profit and capex guidance, blaming what it called unprecedented turmoil at home.

Grant Calloway

Cross asset, nothing's relaxed. The ten year Treasury yield is sitting right around 5.1%, the two year near 4.78%, and the thirty year above 5.4%. Next week the Fed meets, October 27th and 28th. Brent is hovering near $109 a barrel and WTI around a hundred, with the Middle East still simmering. The dollar is near multi week highs, and Bitcoin is above $82,000. And a data point worth chewing on: mortgage applications fell 5.3% last week, even as the average thirty year rate slipped from 7.50% to 7.41%. The first dip in two months, and nobody showed up.

Grant Calloway

On to the movers, and I'll keep them quick. First, SpaceX is up about 8% to 9% premarket, above $160. Third quarter revenue rose 161% to $14.58 billion, and its AI and cloud segment, now called Super Intelligence, brought in $7.6 billion. That's more than Starlink and launches combined. And on the call, Elon Musk said SpaceX and Tesla have both formed special committees to look at a potential merger. He joked he was tap dancing through a minefield. Tesla is up about 3% premarket. Notice that's a committee, not a deal.

Grant Calloway

Netflix is down five to seven percent. Revenue of $12.87 billion and earnings of 87 cents beat the 82 cent estimate, but the company cut its full year revenue outlook to $51.1 billion and lowered its ad revenue forecast. Healthcare is getting a haircut. Intuitive Surgical is off six to seven percent after results that didn't clear a high bar. Danaher is down nearly four percent on a razor thin revenue miss, and Thermo Fisher is down 2% even after beating, following a 31% run in three months. Sometimes a beat isn't enough when you've already priced it in. Same story at AT&T, down about four to five percent despite topping estimates, with adjusted earnings of 65 cents against 60 cents expected.

Grant Calloway

Quick break. This show is brought to you by Jellypod. If you like your market brief sharp and ready before the bell, head over to jellypod.com and see what else they can build for you.

Grant Calloway

Now, Bull versus Bear. Today's question: do SpaceX's numbers justify buying this tape, or do five percent yields and hundred dollar oil win in the end?

Grant Calloway

The bull case first, and it's a fair one. Demand for AI infrastructure is contracted, not hoped for. SpaceX went from AI being about 15% of sales a year ago to more than half of revenue now. Goldman's Christian Mueller Glissmann points to lighter positioning, reasonable multiples outside the mega caps, and strong balance sheets as year end support. And even United, in the middle of its fuel mess, is packing planes at record unit revenue. Consumers are still spending. That's not a collapse.

Grant Calloway

Now the bear, and I'll be honest, the bear has the stronger evidence this morning. You can't outrun energy and debt. United just handed us a clean case study of what a hundred dollar barrel does to a profitable business. Revenue up 17%, and still the profit guide gets cut. CoreWeave's credit default swaps were above 1,121 basis points on Tuesday, a level generally read as distress. UK inflation just flared. Mortgage demand is sliding. And one survey I saw had every economist polled expecting the Fed to hike in December. Hikes, not cuts.

Grant Calloway

So where do I land? I've traded through two crashes, and my instinct is that both sides are right about different time frames. The bull is right about the demand. The bear is right about the price of money and energy. Strong demand doesn't save you if the cost to meet it keeps climbing faster than your pricing. SpaceX shows the AI story is real, but one blowout quarter doesn't fix a bond market at five percent. If I had to bet on what breaks first, I'd watch the weakest balance sheets, not the best stories. And a rally led by one stock, on a merger committee, isn't a foundation. It's a headline. That's my read, not a call to buy or sell anything.

Grant Calloway

On deck today. At 10:30 Eastern, the EIA weekly petroleum report lands, with crude, gasoline and distillate inventories, and with oil where it is, every barrel counts. Also at 10:30, United holds its earnings call, and that's where we'll hear how Kirby plans to price his way out of this. Before the bell, Southwest, Philip Morris, and Abbott Laboratories report, which gives you an airline, a tobacco giant, and a healthcare name in one morning. After the close, the big ones: Tesla, Meta, and IBM. Meta and Tesla kick off Big Tech earnings season, and the question will be spending and returns, same as always.

Grant Calloway

So what matters most today? Oil, and what the airlines say about it. Watch the 10:30 call, and then watch whether the rally in tech can hold up with yields at five. Tune in tomorrow morning for the reaction to Tesla and Meta, and to see if the tape cares. As an old floor hand once told me, markets can stay irrational longer than you can stay solvent, but the fuel bill always arrives on time. This podcast is for educational purposes only and is not investment advice. Have a good one.