Sell the Bailout Rally in United Airlines Stock

The bailout won't fix the airline industry's problems — or the economy — overnight

It’s been an insane month for airlines stocks. Legacy carrier United Airlines (NASDAQ:UAL) has been no exception. UAL stock traded for $90 as recently as January. Last week, it sold for a low of just $18, amounting to an 80% loss of value in scarcely two months.

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However, United’s fortunes are back on the upswing. The Senate recently approved an emergency economic relief package by unanimous vote. The House of Representatives should vote on the bill in coming days as well.

This aid package will provide tens of billions of dollars to the airline industry in the form of cash grants and loans. Traders have rushed to buy back into the airlines. United Airlines stock, for example, has doubled from its low point over the past week, though admittedly the current $33 price is far short of the previous $90 peak.

That said, sometimes when a stock price doubles in a few days, you should take advantage of it and get out while the getting is good. This is one of those cases. While the bailout money will certainly help the airline industry, it’s not a cure-all.

We’re still in the early innings of this economic slowdown, and heavily exposed companies like airlines have plenty more turbulence ahead.

Government Bailout and UAL Stock

The stimulus package that made it through the Senate is set to give the airlines roughly $50 billion in aid. Bulls have taken that headline number and run with it, bidding up airline , including UAL stock, sharply.

But let’s slow down for a second. The actual language around the bailout is not fully hammered out and leaves a lot of leeway. Yes, the $50 billion figure seems set. But it’s not clear how much of this will be cash grants, and how much will be loans.

It also appears to give Treasury Secretary Steve Mnuchin a lot of authority to set the rules on what happens with the $50 billion. Airlines will have to cap executive pay for two years. And perhaps more importantly for shareholders, all airlines will have to suspend dividends and buybacks for at least a year.

In case the government aid isn’t big enough, or doesn’t arrive soon enough, United has also taken other measures to shore up its finances. On Thursday, for example, it announced that it had secured a $500 million term loan from Goldman Sachs (NYSE:GS). United will have to pay back the loan one year from now, which isn’t that far into the future. Still, it’s a nice chunk of liquidity to hold the company over until operations start to pick back up, hopefully later in 2020.

United’s Uneven Competitive Position

Compared to the other legacy carriers, United is in a bit of an awkward position. Of the big three, Delta Air Lines (NYSE:DAL) has the best balance sheet by a significant margin. Delta perhaps would have been able to ride out the current storm even before the stimulus bill passed. On top of that, Delta is aggressively cutting back capacity on its routes to save money.

American Airlines (NASDAQ:AAL) is in the worst shape of the big three. However, that comes with a hidden risk to United. There’s been a great deal of speculation that American could be the first major U.S. airline to go bust. In fact, its bonds were trading in distressed territory heading into the bailout announcement. Assuming air travel doesn’t return to normal quickly, American could easily still end up using Chapter 11 to reorganize.

That, in turn, would potentially leave United in a situation where Delta has more operational flexibility from the front, while American would be reinvigorated on the other end, putting United in a squeeze.

United runs nearly all its routes through hubs, several of which are facing extreme competition. It has relatively little fat to cut in terms of its flying without losing major market share and clientele to the other legacy carriers.

Southwest Could Gain At United’s Expense

There’s one more possible risk on the horizon. It appears that Southwest (NYSE:LUV) may reject its bailout funds altogether. Southwest is in fantastic financial shape, and carries hardly any net debt. This would allow it to possibly forego the government aid, and thus avoid the strings attached to it.

Southwest could continue operating without having to comply with the higher wages, environmental standards and other regulations attached to the bailout funds. It could also continue to lay off employees — that’s something that the bailout would prohibit.

Southwest, you may recall, has been building Denver into its largest hub. This, in turn, is a crisis for United and its own formerly dominant position in the Mile High City. Southwest potentially has a golden opportunity to steal the catbird position at one of United’s best hub locations thanks to the coronavirus from China.

My UAL Stock Verdict

If you bought UAL stock near the lows over the past week, you got a great entry price. Buying low and selling high is the name of the game. People that bought into last week’s panic have earned their reward. But don’t overstay your welcome.

Bear market rallies, historically, tend to be the most vicious. Traders think all is clear, and then out of the blue, the next wave of selling kicks off. It’s too early to say whether we’re going to go plunging back to the market lows from a week ago. But if we do, the stocks that are currently riding the bailout-induced sugar high will get crushed.

The government’s actions are a good first step. However, the economy is still closed for business, and will probably remain that way for quite awhile. The stock market rally this week hasn’t cured the virus, nor has it fixed the economy. Travel demand isn’t going back to normal levels all that soon, and high-cost levered players like United still have a ton of downside risk.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned GS stock.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/united-airlines-ual-stock-sell-the-bailout-rally/.

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