The slow motion decline of United Airlines (NASDAQ:UAL) stock continues to play out. Since March 13, the stock has been in a downward trending pattern marked by lower highs and lower lows. UAL stock is off of its lows, largely because, as InvestorPlace contributor Thomas Niel points out, the airline is eligible to receive – and recently did, as I’ll explain below — a portion of the $25 billion in payroll grants from the CARES Act stimulus bill.
What’s happening to UAL stock is a snapshot of what’s happening in the industry at large as a result of the coronavirus pandemic. The novel coronavirus is the third body blow the airlines received this century. Prior to the recent pandemic, the industry was rocked by the 9/11 terrorist attacks and the great recession of 2007 and 2008.
After the attacks of Sep. 11, 2001, United Airlines filed for bankruptcy in 2002. But while it was among the first to file, it was not alone in taking that course of action. Delta Air Lines (NYSE:DAL) and Northwest Airlines filed in 2005. American Airlines (NASDAQ:AAL) succumbed in 2011. However, that was after the airlines received a second body blow from the financial crisis and subsequent “great recession.”
In both cases, demand was slow to come back but for different reasons. The real concern for investors is that the novel coronavirus is introducing elements of both events into the pricing of the stock. And that means it’s hard to imagine anything close to a V-shaped recovery for UAL stock.
Will There Be a Problem with Both Supply and Demand?
In the aftermath of 9/11, there was some legitimate fear of flying. But there were also new regulations regarding how passengers had to pack their bags and how many bags they could carry on. And then there was the behavioral change of having to remove their shoes to get through security.
In short, flying — which was a convenience — was now a hassle. However, the consumer adapted. Then calamity struck again. But this time, the demand issue was due to a lack of buying power. As millions of Americans saw their wealth shrink, and in some cases losing their jobs, demand for air travel declined.
But the issues stemming from the recent pandemic are unique because it seems they will affect both supply and demand. Certainly a large segment of the population will be hesitant to board a plane and “share air” in a confined space before, and possibly even after a vaccine exists. However, like the period after 9/11, many consumers come back due to the allure of cheap airfare.
But supply will also be an issue. Just because the United States economy “opens up” does not mean that the government will lift the travel bans to certain countries. It may be quite some time before Americans can travel wherever they want to go.
Technology Will Redefine “Essential” Travel
And there’s another issue looming as well. After 9/11, some businesses started to reconsider how much business travel was really necessary. At the time though, the technology (while moving fast) was still not at a place where companies felt it could replace being at a physical location.
But in this age where high-speed wireless, high definition and (soon) 5G networks aid the development of artificial intelligence and augmented reality, it’s likely that some businesses will decide that virtual meetings are the way to go. That will be particularly true as many companies will be eager to patch up holes in their bottom lines.
How Long Can You Wait for UAL Stock?
I’m sympathetic to the plight of the airlines. Critics cite the fact that United and other airlines have become addicted to share buyback programs. This is one reason why United is looking at a lack of cash at a time they need it the most.
But a global pandemic is something that a company can never really plan for until it’s upon them. Recently, United along with other major airliners accepted the government’s terms in exchange for receiving a bailout. According to CNN:
In exchange for accepting the funds, airlines must agree to prohibitions on stock buybacks and layoffs, and limits on executive compensation. Airlines must also provide at least a minimum level of service — as few as one flight weekly — to the destinations currently served.
That said, it’s hard to believe that demand will not return. The American spirit is about the freedom to move from point A to point B and flying is still the fastest way to make that happen. But this will not be a short road back. And because of that, there’s no compelling reason to buy UAL stock any time soon.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
