Enterprising traders may be tempted to buy airline stocks because of the low prices. However, bargain hunters need to really weigh the pros and cons of owning United Airlines (NASDAQ:UAL) stock. It might be worth buying eventually, but today isn’t the day.
It will take time before the impact of the coronavirus from China is fully understood. Travel bans, flight cancellations and airplane groundings indicate more pain ahead for UAL stock. We’re all rooting for the major American airlines to recover, but that doesn’t mean you should jump into an unfavorable trade.
Problems and More Problems
It’s just one setback after another for United and other airlines. Before even considering a long position in UAL stock, it’s wise to wait for at least a solid month without any major problems.
For instance, President Donald Trump recently added to the growing list of travel restrictions with a tweet, saying, “We will be, by mutual consent, temporarily closing our Northern Border with Canada to non-essential traffic.” This occurred at around the same time the White House closed the U.S.’s border with Mexico. Prior to that, travel restrictions from Europe to the U.S. were imposed.
You can even bookmark the U.S. Department of State’s regularly updated list of international travel bans and restrictions. Just checking that list on a daily basis should be enough to dissuade you from considering owning UAL stock for the time being.
There’s still room for the U.S. government to ban interstate flights. Plus, more nations could restrict travel between nations. And due to the havoc that the coronavirus has wreaked on the travel industry, United announced that the company is considering more flight-capacity cuts for the months of May and June.
No Employee Furloughs (Yet)
Granted, the U.S. government’s $60 billion airline-bailout package should provide some relief. It should be noted, though, that the bailout involves certain restrictions concerning dividend payouts, stock-share buybacks and employee layoffs.
Along with the government’s layoff restrictions, United Airlines Chief Executive Oscar Munoz announced that his company is making an effort to avoid sending workers home. He stated in a memo, “United will not conduct involuntary furloughs or pay cuts in the U.S. before September 30th.”
Irrespective of the CEO’s best intentions, it’s hard to imagine that United will be able to avoid furloughs and pay cuts this year. The company’s memo fully admits that flight demand is likely “to remain suppressed for months after [flight-schedule cuts in May and June], possibly into next year … If the recovery is as slow as we fear, it means our airline and our workforce will have to be smaller than it is today.”
Indeed, the numbers add up to a slow and unsteady recovery. United Airlines’ plans for April include a reduction in domestic-flight capacity of 52%. If this occurs, then the total scheduled flight-capacity reduction for April would be a whopping 68%. Moreover, the airline’s international-flight capacity is expected to decline by a shocking 90% in April.
The Takeaway on UAL Stock
United Airlines can pledge “no furloughs” and “no pay cuts” as much as they please. This doesn’t mean that the airline can stick to its promises for much longer. The entire airline industry is suffering. Until the situation turns around, you don’t need to suffer with a long position in UAL Stock.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.
