There is a morality to bankruptcy that is lost if everyone gets a bailout. Take United Airlines (NASDAQ:UAL) and UAL stock.
It’s not that they lost $1.7 billion, $6.86 per share, on revenues of $8 billion during the quarter. The second quarter will almost certainly be worse, and the third doesn’t look good, either.
It’s that when times were flush, the airline wasted its seed corn. It bought back $1.64 billion of its stock in 2019. Even before the pandemic, it had over $13 billion in long-term debt with just $3.8 billion in cash and investments to cover it. In last year’s first quarter, when it had $1.9 billion in operating cash flow, United’s net cash flow was just $152 million.
United was profligate when times were good, then had its losses absorbed by the taxpayer when things turned sour.
United’s PR Push
United’s first quarter report was filled with public relations puff, meant to justify the CARES Act grant and loans of $5 billion that will keep it solvent through September. (That total could rise to $9.5 billion if it chooses to borrow more under the act.)
United suspended the pay of executives and turned aircraft purchases into leases. It ended the share buybacks and masked flight attendants. It also cut the capital budget by over one-third to $4.5 billion. But if the intent of the act was saving jobs, United didn’t do it, putting over 20,000 employees on unpaid leave.
Some of its acts are even getting rivals’ hackles up. American Airlines’ (NASDAQ:AAL) CEO Doug Parker says United’s plan to turn full-time workers into part-timers starting May 24 violates the intent of the law.
Parker’s right. United has taken $3.5 billion in a grant specifically meant to protect workers and protected shareholders with it instead.
Buffett Says No, Thank You to UAL Stock
United shareholders have taken a hit from COVID-19. Their equity value is down 72% from the start of the year. Moody’s is considering a downgrade of United’s Ba2 bond rating. But the bailout created a huge rally in its bonds. They still sell at over 90 cents on the dollar, down just 11.7% on the year.
That’s the problem. While bankruptcy wipes out shareholders, it allows operations to continue and forces debt holders to take haircuts. That’s not happening. Instead, United is handing the pain to its employees and protecting the equity holders.
Jonathan Berk of Stanford University has joined 200 other academics in saying United, and the other airlines, should be allowed to go bankrupt. “Spending taxpayer money to bail out large corporations is a huge mistake. The money should instead be spent on the people who are most affected,” they wrote on the Stigler Center at the University of Chicago Booth School of Business’ blog.
The academics sound a lot like Warren Buffett, who sold out Berkshire Hathaway’s (NYSE:BRK.A) positions in the airlines recently. A recent headline in Barron’s said, “this may be the bottom,” but the body of the story notes that present operations aren’t sustainable.
United could run out of cash within a year unless traffic returns, analysts say.
The Bottom Line on UAL Stock
You can speculate on United Airlines stock here. The company’s first quarter revenue was $8 billion, and UAL stock opened for trade May 6 at $24, meaning the equity is worth $7 billion.
The airline will remain solvent through the year. The administration has signaled that shareholders will be protected in any future economic bailout. The additional debt being taken on for the bailout is manageable. So is the equity dilution from the warrants United is giving the government.
But unless traffic returns, United will be broke again in a year, and shareholders could be facing a very different political situation.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.