In this time of crisis, the U.S. government is doing all it can to keep the economy afloat. The first phase was worth about $2 trillion, with part of the money going directly into consumers pockets. But another part is focused on saving critical sectors — and the airlines are part of the bunch that the White House wants to save. So as bad as things are for United Airlines (NASDAQ:UAL) now, big brother is looking out for it. This should give investors enough courage to catch the falling UAL stock knife.
This sounds easier than it actually is, because there are still too many murky variables. For instance, airlines are not ecstatic about the bailout because only about 70% of it is free. The rest is made up of loans and probably comes with restrictions. Businesses usually don’t like the government to meddle in how they operate.
If they take the loans then United Airlines’ management will probably need to justify its decisions to the White House.
UAL Stock Needs the Government Bailout
United Airlines will have to swallow its pride and accept what ever terms they get.
They have no choice because their business is dead. Demand has never been lower for these companies. The experts have a horrendous outlook for the flying business. Fitch Ratings, for example, forecasts revenues to be down 90% in the second quarter, then down 60% through the third.
If that turns out to be true then UAL stock will not only take this lifeline with all its tethers, but ask for more.
While a vaccine is still months away, the scientists think that they are getting closer to flattening the Covid-19 curve and finding drugs to treat its symptoms. Soon the world will start going back to work. But this will be a curve, so business will not reappear all at once.
What makes betting on the airlines a good long-term decision is the fact that flying is not optional. Cruising could wait, but the world will need to fly sooner rather than later. In addition to commerce, there are millions of displaced people that need to return home.
Meanwhile, I am confident that the government will offer airlines another lifeline should they need it until they get off the ground. Meaning that this bailout could be round one of many.
There is no doubt that things are tough and different than they have ever been for commerce. Since Wall Street hates uncertainty, this make this stretch of time truly unnerving for investors. Those who cannot stand taking any risk should stay out. Otherwise, the concept of risk remains the same — only the degree is different.
First, the stock market in general could still have another 30% downside if this virus mutates, for example. Second, the very survival of the UAL stock is part of the debate. The 2008 crash taught us to expect that sometimes, even massive companies like Lehman Brothers, AIG (NYSE:AIG) and General Motors (NYSE:GM) can collapse.
There is a potential for good news to come soon. For instance, we could see the release of the Boeing’s (NYSE:BA) 737 Max. Also, eventually, governments will begin easing the quarantine orders. Both are imminent, and they should help these airline stocks get back on their feet.
The news from the medical community is getting brighter and that is the courage the authorities need to kick-start the world again.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
