For value investors, the temptation of picking up a major airline like United Airlines (NASDAQ:UAL) during this dip is immense. But just because UAL stock is relatively cheap, that doesn’t make it a good value play. Much of United’s hammered share price has been deserved as the airline struggles against headwinds that will likely persist in the years to come.
This week, United revealed just how badly the novel coronavirus had impacted its business during the first quarter. Investors and analysts were shocked — and not in a good way. Everyone knew that airlines would be thumped by the coronavirus pandemic, but they didn’t expect it to be quite so devastating.
UAL Stock Nosedives on Earnings
United reported a $2.1 billion loss in Q1, a massive disappointment compared to analysts’ forecast of a $533 million loss. Revenue was down 17% and management was not optimistic about the future.
According to United’s President Scott Kirby and CEO Oscar Munoz, the demand for air travel fell to “essentially zero and shows no sign of improving in the near term.”
Again, investors should have expected that. But the results came as a sharp contrast to news that some states are starting to reopen in the coming weeks. That made it sound all the more distressing.
United, like the rest of its peers, applied for government assistance to help it get through the crisis. The firm is expected to get a $5 billion dollar bailout check, and management says it’s also working to obtain $4.5 billion in additional government loans.
That $9.5 billion injection of cash won’t be enough to slow the bleeding, though, according to Kirby and Munoz’ letter.
What’s more, United’s bleak results were followed by an even worse picture of the industry going forward. The firm essentially told shareholders it’s unsure exactly what the future holds, but it’s not going to be rosy.
For now, the airline industry has been brought to its knees as lockdowns keep people from traveling. While several states lifting lockdown restrictions does offer a glimmer of home, it’s unlikely that the demand for air travel will recover anytime over the next few months.
Analysts are expecting May and potentially June to hold more of the same terrible passenger numbers. Estimates for the firm’s load factor, or the percentage of seats it’s able to fill per plane, are hovering around 69%. In the first quarter that figure was 78%.
That kind of drop in load factor could be devastating to United as it would eat into the firm’s margins significantly. But 69% is an optimistic measure.
Keep in mind that the coronavirus really only impacted the end of United’s Q1 results. The majority of United’s revenue comes from North America, so although the firm likely suffered as the virus hurt travel in other parts of the world, it wasn’t until the final month of the quarter that the firm would have seen the impact in its largest market.
Now consider that April has been the most painful month for airlines because they can’t fly anywhere at all. Those figures aren’t included in the Q1 results — so you can assume that Q2 is going to be far more painful than Q1, especially if the lockdowns persist through the summer.
Then there’s the question of how and when air travel will resume — and whether it will at all. Business travelers make up roughly 12% of most airlines passengers, but their tickets are twice as lucrative. Now that the world has adjusted to telecommuting, business travel isn’t likely to resume quickly, if at all.
Of course, there will still be some scenarios in which business travelers still need to be there in-person. But as companies try to repair the financial damage that coronavirus has inflicted over the past few months, they’re likely to continue utilizing the telecommuting infrastructure they’ve got in place.
The Bottom Line
Of course, UAL stock isn’t going to be punished forever. If you’re looking at three years down the line, the firm will probably deliver an impressive recovery. But it’s going to take a long time, and your capital could be better deployed elsewhere.
Even within the airline industry, there are better picks. Domestic air travel will likely pick up ahead of international flights because of coronavirus outbreaks in different parts of the world. Southwest (NYSE:LUV), for example, is better positioned to capitalize on Americans’ return to flying.
But all in all, United’s earnings sent a powerful message to investors this week — it’s worse than we thought. Without knowing whether travel can resume and if the coronavirus can be contained, it’s a risky sector to put your money in.
Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.