For United Airlines, Less Bad Is the New Good

United Airlines (NYSE:UAL) has had a recent run of “less bad” news. The airline is announcing it is seeing a reduction in cancellation rates. They are also seeing “moderate improvement” in demand, even regarding international travel. And UAL stock is up over 34% in the last five trading days as of this writing.

For United Airlines, Less Bad Is the New Good
Source: travelview / Shutterstock.com

However, for United Airlines, and other airlines, less bad is the new good. United is still saying it is forecasting a 75% year-over-year reduction in July capacity. As the U.S. economy begins a tentative, phased-in reopening, the airlines will begin to fly again. And that may get you thinking it is a good time to jump in on airline stocks such as United Airlines.

I think the long-term outlook for UAL stock is good. But there still doesn’t seem like there’s a reason to jump in right now.

Let History Be Your Guide

If you look at 2008 and 2009, the depth of the financial crisis, UAL stock was trading below $10. In fact, for much of the time, it would have been considered a penny stock. However, investors who were willing to buy shares of United Airlines at that time and hold them until today, would still be holding onto an impressive gain of over 690%.

That’s right. On July 2, 2009, shares of UAL were trading at $3.31. An investor that purchased 100 shares for $331 would “still” have $2,618. Of course, if that same investor was prescient enough to sell shares on Valentine’s Day, they would have had pocketed a gain of over $7,500.

So, the question investors need to ask is whether or not you believe that the worst may be over for United Airlines? It certainly seems like it may be. The airline itself is saying that it is noticing fewer cancellations.

But as my InvestorPlace colleague Thomas Niel wrote recently, you can afford to wait on UAL stock. It’s probably not going anywhere anytime soon.

Owning Airline Stocks in the Age of Anxiety

The purpose of this overly simplistic example is to emphasize that historical perspective is important. Airline stocks are volatile because at their core, they are responsible for transporting human beings from point A to point B. And that seems simple enough until you think about it.

I love to fly. I don’t mean it’s always comfortable or convenient. But it still fills me with a bit of wonder and awe that I can wake up at home in my bed and go to sleep halfway around the world or at the home of a friend who lives half a nation away. It’s a perk of living at this time.

But there is a cost to flying. One of which is that to get from one place to another, we have to share a confined space and breath the same air as other people. If you’re traveling on a commercial plane, that can be uncomfortable. And a virus that can be transmitted by people who are not showing symptoms adds to the anxiety.

There’s another cost to flying. And that’s the economic cost. And right now, while United Airlines may be taking steps to cleanse their airplanes of the virus, a bigger headwind is that Americans may not have the money to fly. On May 21, 2020 another 4.4 million Americans applied for unemployment.

It’s going to take time for the business of America to get back to normal. Or as InvestorPlace’s Nicolas Chahine recently wrote, “Prices will definitely need to rise at a time when 23 million citizens are out of work. This will further negatively impact the consumer flying habits.”

UAL Stock Will Recover from the Virus…Eventually

There is an implied, if perhaps unrealistic, transaction we make with an airline. We are going to get on your plane, and we’re going to arrive at our destination. And when we do, we’re going to do so without having picked up a virus.

That’s a lot that can go wrong and much of it is outside of the airlines control. But in addition to this psychological hurdle, which will go away, airlines are facing an economy that has gone from being robust and growing to being in recession with an uncertain future.

If you’re willing to wait on UAL stock, it may reward you in the long term. But that’s not a gamble you need to take right now.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/for-ual-stock-less-bad-is-new-good/.

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