United Airlines is drawing attention over its recent decision to release two different sets of investor guidance. Some commentators are correctly noting that two sets of guidance is a “novel” occurrence.
Usually, companies release one set of guidance that reflects its assumptions about the economy’s probable future path. Alternatively, on rare occasions, companies may decline to release any guidance at all, asserting that the economy (at that moment) is so unpredictable that any information would be too speculative to be useful.
So why two? And why now? According to United’s economic forecasters, we will either experience an economic recession in the near future, or we will not. If we do, the future will feature one set of economic conditions. If we don’t, it will feature a very different set.
That’s a classic case of circumstances that warrants an approach called Scenario Analysis. It’s different than Sensitivity Analysis, an approach that is employed when future conditions are relatively predictable, but when specific quantitative assumptions (such as sales volume or the cost of labor) may vary by a few percentage points in either direction.
In Scenario Analysis, one can define two or more (very different) potential future paths. One can also define the economic conditions that would exist for each potential path. However, one cannot be certain (and, instead, one is very uncertain) which specific future path is more likely to become our future reality.
That’s the situation in which United finds itself today. It may be novel from a historical perspective, but it isn’t worrisome at all, given the extremely volatile state of our contemporary global economy. Thus, it would not be surprising if other companies adopt United’s approach and decide to issue multiple sets of guidance for their own investors.
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