What a difference a few months can make. Three months ago, United Airlines (NASDAQ:UAL) was flying high. At the start of December, UAL stock was trading near the $92 level, just $5 off its all-time record highs. Then the coronavirus from China struck. With global travel and tourism hammered, airlines are being hit worse than most companies. UAL plunged. Last week, it closed as low as $21.28 — a 77% drop from the start of December.
With its stock at levels not seen in a decade, is this a buying opportunity — a chance to scoop up United Airlines at bargain bin prices?
Hoping for a Bailout
Airlines in general are hurting, and United is no exception. Last Friday, United sent an email to employees warning that without financial assistance, it would be forced to undertake mass layoffs by the end of March.
The plummet in share prices across the industry tell the story of how desperate the current situation is for airlines. Since mid-February, the Dow Jones U.S. Airlines Index has fallen 61%. Since the first market crash on Feb. 20, UAL shares have dropped 69%. American Airlines (NASDAQ:AAL) has lost 64%. Delta (NYSE:DAL) is down 63%.
With coronavirus travel restrictions in place, international flights by U.S. airlines have all but halted. Domestic schedules are also beginning to be cut.
Unfortunately for United, bailing out airlines is a touchy subject. Flyers have been enduring belt-tightening measures for years, including shrinking seats, reduced leg room and increasing fees. Meanwhile, rather than improve service, airlines have been pouring their cash into share buyback programs that benefit investors. This hasn’t endeared airlines to consumers, making politicians wary.
The government introduced a $2 trillion coronavirus stimulus bill last week. Despite the potential for political fallout over proving financial assistance to airlines, the bill contained $50 billion specifically earmarked for passenger airlines, and an additional $8 billion for cargo air companies. The bill failed to pass in the Senate over the weekend. That doesn’t mean it’s dead, but immediate relief for airlines isn’t coming and when it does, it may have strings attached.
Recession Next Challenge for Airlines
When the coronavirus pandemic is under control, which could be months or longer, airlines will face another challenge. The economic damage inflicted is likely to result in a recession. In tough times, people don’t indulge in luxuries like vacations. Businesses cut down on trips. Air travel takes a hit. During the Great Recession of 2008, airline stocks declined 68%.
Bottom Line on UAL Stock
InvestorPlace contributor Will Ashworth points out that over the past decade, United Airlines has allocated 80% of its cash flow to stock buybacks. With the economy tanking and travel looking shaky for the foreseeable future, that capital allocation has put UAL in a tenuous position: “UAL has an Altman Z-Score of 1.29. Anything under 1.81 suggests the company could go bankrupt in the next 12-24 months.”
Just one month ago — before the coronavirus crisis hit home in America — analysts were bullish on UAL stock, giving it an overweight rating. Today, it is a consensus hold, reflecting the uncertainty about the fate of United and airlines in general.
The bottom line is there are three big factors that are ultimately going to dictate whether United Airlines survives, and how well its stock performs in the foreseeable future.
The coronavirus is the big one, of course. If the global pandemic goes on, air travel is going to continue to be decimated. The next hurdle to overcome will be the prospect of recession. The primary hope for surviving both of these issues is a government bailout. The first swing at that failed to pass. This doesn’t mean it won’t happen eventually, but it does mean that without that financial security UAL stock remains a risky bet at the moment.
Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015. As of this writing, he did not hold a position in any of the aforementioned securities.