There Is No Quick Fix For United Airlines

The stock market has enjoyed a tremendous rally in recent weeks, but the airlines have missed out on the rebound. United Airlines (NYSE:UAL) stock, along with other rivals, has barely budged off their multi-year lows.

UAL Stock: There Is No Quick Fix For United Airlines
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This is particularly troublesome news for UAL investors because the stock finds itself in dangerous territory. It’s a well-known principle in technical analysis.

Companies that fail to go up when the market rallies are the most vulnerable in the next correction. Just as traders want to own the leading stocks, they want to avoid (or sell short) the laggards.

Airlines just received a massive government aid package, and most other transportation stocks, like railroads and parcel delivery companies, are surging. Yet the airlines have been losing altitude. And that will only accelerate in coming weeks.

Demand Won’t Return Overnight

Over the past few weeks, bulls have been quick to point out a potential upside scenario. With the Fed and Treasury engaged in unprecedented stimulus, there is a lot of money sloshing around out there to boost the economy.

Additionally, there are signs that the virus is starting to slow down. Thus, much of the country should be able to reopen, at least to a considerable degree, in May.

With that in mind, shouldn’t the economy start getting back to normal this summer? “Starting to” is the operative phrase. It won’t be a light switch, where everything turns back on suddenly. A lot will come back quickly assuming the virus follows a fairly benign path. But we aren’t getting back to 100% of normal that soon.

For one thing, the unemployment rate will likely reach 20%, or somewhere around there, within a few months. Those people are going to spend far less money than they used to. And many businesses will remain closed or have greatly reduced operations until 2021.

Concerts, live sports, festivals, business conventions, and more – those drivers of air travel will be slow to return. Even if regulators permit these events, many folks will choose to avoid large gatherings for now.

80% Isn’t Good Enough

For many companies, particularly ones with great balance sheets, they can endure a slowdown. If they get 80% of normal business for a while, they’ll take an earnings hit, but they can get by. Airlines are not like that, however.

Given the immense fixed costs and overhead, airlines need every dollar they can obtain. There’s a reason airlines nickel-and-dime passengers with steeper and steeper fees; it’s the difference between making a small profit and a loss on every flight. In fact, just a couple points swing in load factor – how full an airline’s planes are on average – is the difference between being in the green and losing hundreds of millions of dollars per year.

United Hubs Will See Lingering Slowdowns

Specifically to United, it’s worth considering that two of its hubs may be especially affected by the virus. The Houston hub is a vital port for both the energy industry and Latin-America bound travelers. Both of these will be under heavy fire.

The recent oil crash has energy companies rushing to cut costs; they’ll certainly be spending less on business travel. And many formerly well-paid Houston energy workers will be out of work altogether in a $20 oil world, causing a steep drop in leisure demand from there as well.

Houston also serves as United’s big hub for Latin American travel. Given its ideal position as the nearest hub to many major Mexican and Central American cities and beaches, it has been a solid asset for United. Now, however, Latin American economies are plummeting; Mexico City in particular is one of the world’s hardest-hit big cities by the coronavirus, and recovery could be slow – the virus is still growing exponentially there now.

And then you’ve got United’s Denver hub. There have always been questions about the Denver hub, given the level of competition there. Southwest (NYSE:LUV), Frontier, and United all fight over a market that isn’t that big. And now, two major drivers of Denver traffic are in trouble. Denver is a major energy and natural resources hub, so it faces a traffic loss there, like Houston.

Denver is also the entry point for Colorado’s world-famous ski resorts; Vail Resorts (NYSE:MTN) is headquartered nearby. Vail had to suspend skiing operations for this current winter season due to the virus. And it’s unclear what that 2020-21 ski season will look like. If there is no big second wave of the virus, Vail will probably operate.

But in a dismal economy with double-digit unemployment, will people be in the mood for expensive destination vacations like that anyway?

UAL Stock Verdict

United stock dipped sharply last week after launching a secondary offering. It sold 42 million shares at $26.50. The stock tumbled nearly 10% on the news. This is a problem because, while it may sound like a lot of money, it will only cover United’s expenses for about a month at the current $1 billion or so monthly burn rate.

When you start considering United’s probable losses over the next three or six months, you start wondering just how many times the company may have to raise cash, causing further share sell-offs. And even if 80% of traffic comes back pretty quickly, the company likely will continue to lose lots of money out into 2021.

Remember that the government put strict restrictions in place around firing employees and other moves that will keep airlines’ cost structures elevated even as revenues are scarce.

With the government bailout, airlines got a lifeline. And United prudently raised more money last week. However, as investors realize that there will be no quick recovery for the industry, look for the airlines to take another big leg lower. The fact that UAL stock has hardly advanced at all since the March lows, despite a tremendous market rally, is a glaring warning that the stock is vulnerable to sharp downside in the near future.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/there-is-no-quick-fix-for-united-airlines/.

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