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Should You Buy United Continental Holdings Inc (UAL) Stock? 3 Pros, 3 Cons


Unless you’ve been living under a rock, then you know that United Continental Holdings Inc (NYSE:UAL) is under fire for forcefully removing a passenger from its flight. The passenger, Dr. David Dao, refused to vacate his seat at the request of UAL, which needed to fly its employees. He claimed that he had patients to see the next morning, and could not leave the flight.

Should You Buy United Continental Holdings Inc (UAL) Stock? 3 Pros, 3 Cons

Source: Shutterstock

United Continental, rather than doing something logical like calling the captain or raising the monetary incentive, instead called security. What occurred next shocked and upset not only the nation, but the entire world.

After a brief talk, security personnel grabbed Dr. Dao, forcing him out of his seat. In the process, the doctor hit his head, and appeared to be knocked unconscious. Finally, a security agent dragged him out like an animal, to the shrieks of passersby.

When you thought things couldn’t get any worse for United, CEO Oscar Munoz happily proved us all wrong. Initially, Munoz apologized for “re-accommodating” Dr. Dao, which rightfully led to social media derision. Bizarrely, in an internal email to United Continental employees, Munoz described Dao as “disruptive and belligerent.” After it was apparent that the Negan-style beat down was not “fake news,” Munoz apologized, finally, for the “truly horrific” incident.

UAL stock, United Continental, controversy

Source: Julia Enomoto

Inevitably, United Continental will be hit with one of the biggest lawsuits in corporate history.

United would be wise to not make too much of a fuss, and settle out of court. But how would UAL stock absorb this hellish week? Is this an opportunity to buy a suddenly undervalued company, or is there more pain to come?

Let’s take a look at the three pros and three cons for UAL stock.

UAL Stock Pros

Apathy: The outrage against United Continental was palpable as soon as the video of an unconscious Dr. Dao surfaced. When UAL was slow to accept responsibility, the crescendo of fury was impossible to ignore. People took to Twitter Inc (NYSE:TWTR) to boycott United. Some demanded Munoz’s head, while others celebrated the volatility in UAL stock. But we Americans are an apathetic bunch, and the 24-hour news cycle all but guarantees that sooner or later, another company will do something foolish enough to make us forget about United’s scandal.

Consolidation: For years, airliners have struggled with stiff competition and a dragging economy. In response to these pressures, many companies merged to form “super-liners.” Thus, it’s United Continental, not United and Continental. This strategy helps struggling outfits better thrive in a declining industry. Unfortunately, for the passengers, it hasn’t necessarily been a welcome change. One of the problems is the lack of options. Some routes are so uneconomical in the grand scheme of things that only one or a handful fly them. So a boycott would hurt everyday passengers more than it would UAL stock.

Money: At the end of the day, money talks and the smelly stuff walks. And boy, does United Continental have plenty of money. At last check, UAL has more than $4.4 billion. It’s also one of the more profitable airlines and the company is consistently growing the top line. Again, if management is smart, they’ll work with Dr. Dao and his attorneys. Millions of dollars upfront. Free first-class airfare for his family for life. A shock-and-awe offer of generosity could quiet the mob scene and get UAL stock back on the right track.

UAC Stock Cons

Unprecedented: Inarguably, this incident is the worst customer service-related debacle in airline history. Unruly and possibly psychotic passengers largely generated the litany of airline incidents that hit the news cycle. What happened to Dr. Dao, however, stands in sharp contrast to those incidents. There’s also a chance that the actions against Dao are illegal. The Department of Transportation has strict policies and procedures for passengers denied boarding (page 55 of the DOT Federal Register). This includes a disclosure of passenger rights. However, law enforcement has zero rights to assault an already boarded passenger. Could this get uglier for UAL? You bet!

Options: Proponents for UAL stock will argue that airliners are driven by macro factors, like oil prices or economic stability. They are not driven by public relations nightmares, no matter how ugly. For the most part, I agree wholeheartedly. I just don’t see how United Continental can escape this one so easily. Let’s be real — UAL has slipped in the markets because the industry is going through a rough patch. When you have slim pickings, you pick the best. Why risk UAL stock when Delta Air Lines, Inc. (NYSE:DAL) or Alaska Air Group, Inc. (NYSE:ALK) are on deck? Both offer great customer service. Both won’t beat the snot out of their passengers.

Political: At least two mainstream articles — one from Fortune and another from Inside Edition — mentioned the race or ethnicity of Dr. Dao without mentioning the race/ethnicity of other parties to the incident. That angle was not lost on the Chinese, many of whom called for a UAL boycott. United Continental could care less about a flight to Louisville. They’re going to care a lot about flights to Beijing.

United’s Unfriendly Skies

Considering the pros and cons of UAL stock, my gut reaction is that this is a net negative. This does not mean that United Continental will go bankrupt. It does mean, however, that those who believe this will “wash away” somehow are respectfully misguided.

What happened to Dr. Dao is an absolute disgrace. The coverage from the mainstream media was equally terrible, dishing up personal dirt that is irrelevant to the case. But worst of all was CEO Oscar Munoz. To limply and vaguely apologize, then attack, then offer a “heartfelt” apology is, quite frankly, pathetic.

Yes, United can flip us peons the bird. Most of us will fly UAL and they know it. But their brand name is now garbage. And Munoz will lose his job — he has to.

But UAL will suffer long-term pain because they committed a cardinal sin — giving your rivals ammunition. You can never assume success in any industry, let alone the airliners. United’s rivals will gleefully troll the embattled company, and worse, will steal its market share in critical growth regions.

As Negan said, “Gonna be pee-pee-pants city here real soon.”

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/04/should-you-buy-united-continental-holdings-inc-ual-stock-pros-cons/.

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