United Airlines (NASDAQ:UAL) and rival carriers got what investors were expecting last week, that being a roughly $50 billion bailout from Uncle Sam, news of which ignited a 34% rally in UAL stock.
For devotees of the old Wall Street adage “buy the rumor and sell the news” this would be an opportune time to consider selling the news with UAL.
The $50 billion in loans airlines can access is more than triple the $15 billion Congress allocated to the business following the Sept. 11, 2001 terrorist attacks that rocked the industry.
Yes, that means airlines are being bailed out for a second time this century, prompting relevant concern among investors regarding whether or not this industry is actually learning any lessons. One thing is certain: when the coronavirus situation eases, the United Airlines that emerges won’t look like the carrier it was prior to the pandemic.
Amid the COVID-19 outbreak, the company previously said it will cut 42% of its routes, a percentage that was later elevated to 52% and by some estimates, come April, the carrier will slash capacity by two-thirds.
Leaner Doesn’t Necessarily Equal Meaner
In a message to employees last Friday, United CEO Oscar Munoz and President Scott Kirby drew comparisons to the coronavirus situation and 9/11 while saying deeper capacity cuts are coming.
The global economy has taken a big hit, and we don’t expect travel demand to snap back for some time,” said the executives. “Our April schedule is already cut by more than 60% and we expect our load factors to fall into the teens or single digits even with 60% less capacity. We are currently planning to make even deeper cuts in May and June.”
Additionally, United has said it’s not planning mass layoffs, which is positive from a broader economic standpoint, but investors have to wonder what becomes of workers at an airline that is offering dramatically fewer routes than it was just a few weeks ago.
Another matter to consider with legacy carriers, such as American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL) and United, is that the core competencies of these companies is more long haul than short haul. In economic downturns, long haul routes suffer and those are types companies like United are paring. That could open the door to more nimble competitors to steal market share.
Another issue is visibility or lack thereof. Currently, companies across the travel and leisure industry – be they airlines, casino operators or hoteliers – have no visibility regarding when the global economy will return to normal following the coronavirus because governments can’t accurately give citizens and companies a timeline for when that will happen.
The other variable is consumers themselves. Sure, there will be “pent up” demand to get back to business as usual when the virus subsides. However, plenty of analysts and market observers are warning consumers’ habits and tastes will be altered by COVID-19.
Bottom Line: It’s Hard to Trust UAL Stock
For anyone that bought UAL stock around the 52-week low or even in the lows $20s, you made a good bet and it’s time to take profits because what little good near-term news the airlines can offer is out in the open.
Looking further out, airlines already showed investors they aren’t great allocators of capital. For years of subjecting travelers to any fee under the sun – baggage, headphones, food and more – the industry generated cash flow aplenty, yet here they are once again suckling at the teat of the federal government. And remember, this is happening with oil – a major cost input for airlines – at multi-decade lows.
Think of UAL and most of the airline stocks out there this way: nearly everyone says they love to travel, but no one ever says they like to fly. If investors insist on dancing in the airline industry, they’d do well to embrace a quality name, and legacy carriers like UAL aren’t doing anything to deserve that label.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold any of the aforementioned securities.