On Wednesday, beleaguered United Airlines (NASDAQ:UAL) received the first piece of substantive good news since the novel coronavirus destroyed the global economy. And UAL stock appreciated the breath of fresh air.
According to Dr. Anthony Fauci, the Director of the National Institute of Allergy and Infectious Diseases, Gilead Sciences’ (NASDAQ:GILD) drug remdesivir demonstrated encouraging results in terms of reducing recovery time from the coronavirus. As a result, the broader markets jumped higher, with a pronounced, double-digit effect on UAL stock.
Of course, it wasn’t just United that saw some love. Competitors such as Delta Air Lines (NYSE:DAL) and American Airlines Group (NASDAQ:AAL) also enjoyed double-digit gains in the midweek session. For the airliner industry, a viable coronavirus treatment represents a godsend. Due to its infectiousness, those who share the same air within tight quarters are presumably at higher risk of contraction.
Obviously, a treatment protocol would be cause for belief in the pent-up demand thesis for UAL stock. However, investors should use caution with this narrative. For one thing, Dr. Fauci’s support doesn’t necessarily mean that remdesivir will work as desired. Other tests showed a lack of efficacy or inconclusive results.
So even if remdesivir stands up to further trials, ramping up scale is another challenge. And should the coronavirus return in the fall or winter as Dr. Fauci has suggested, there’s no clear system in place to determine who has taken the drug. In that case, UAL stock risks falling back into the same cloud of uncertainty it’s in today.
In addition, we’ve got to question the consumer’s willingness to travel again — especially so soon after this crisis. With people forcibly stuck at home, most have likely grown accustomed to avoiding each other. And shifting that paradigm will take time.
Unreal Demand Loss Will Plague UAL Stock and the Airliners
Now, some companies are racing to provide “new normal” solutions to reinvigorate consume confidence toward airliners. For instance, some airliners could adopt rear-facing plane seats to help maximize social distancing in confined spaces.
It’s a creative idea. But even if people wanted to fly, many simply cannot. With the U.S. economy contracting nearly 5% in the first quarter — and more pain on the way — cash is king. And the reason why cash is king is because so few people have it.
If they do, they’re not going to plunk it down on a vacation that could get them sick.
This isn’t a stretch by any measure. Recently, my InvestorPlace articles have focused on hard data. And the most significant data point for airliners is the price of jet fuel. According to basic economic principles, if people want to fly, the price for jet fuel will increase.
Instead, the opposite is happening — and to a dubious, record-breaking degree. On March 13, the weekly change in jet fuel prices dipped to a loss of 26.3%. That is the worst week-over-week loss that the U.S. Energy Information Administration has on record.
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For context, the worst weekly loss during the Great Recession occurred on December 12, 2008. At that time, jet fuel prices “only” lost 13.4%.
If that wasn’t bad enough, consider that between March 13 and April 24, we have four weekly sessions that incurred losses of 20% or worse. The average is nearly 24%. So honestly, you couldn’t have a more terrible situation for UAL stock.
No matter what United does, they’re facing untenable circumstances. If they cut their prices to draw people back in, they lose margin. If they keep prices the same, no one will fly. Thus, UAL stock is really a bull trap.
Even a Restored Economy Means Painful Changes
A few days ago, JetBlue Airways (NASDAQ:JBLU) announced that they will require all passengers to wear a face covering. Joanna Geraghty, JetBlue’s president and chief operating officer, had some strong words, saying that this is the “new flying etiquette.”
Frankly, I have mixed feelings about this. On one hand, I believe most Americans — particularly the younger generation — are poorly reared by morally bankrupt parents. So on a personal level, I loved that Geraghty was dropping the hammer, during a pandemic of all times. What moxie!
On the other hand, this points to the worrying trend that airliners must make drastic changes to accommodate the new normal. Many companies are experimenting with this, such as blocking out the middle seats. But in a market geared toward filling every airplane to the brink, how will this change the business model?
In my opinion, probably very negatively. I’m not breaking new ground when I suggest we’ll see mass-scale consolidation here. But trying to figure out winners from losers in this incredibly dynamic sector is too much of a hassle for me. Therefore, I’m taking a pass on UAL stock.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
