Airline traffic has increased in the past few weeks, but investors remain skeptical. According to the Transportation Security Administration, the number of passengers going through TSA checkpoints increased 264% this month. That’s a flicker of hope for United Airlines (NASDAQ:UAL) stock as the company looks to control its daily cash burn.
Preliminary forecasts for traffic levels in the second quarter are encouraging. The company reported that it estimates a 75% decline in scheduled capacity in July, up from 90% reductions in May and June.
After a tough first quarter, United Airlines is looking to become leaner and improve its liquidity position. This will help it take advantage of the steady rise in traffic levels.
Let’s look at some of the reasons why UAL stock will find itself in a great spot after the pandemic.
Liquidity Is King for UAL Stock
United Airlines has been remarkably proactive in its approach toward the novel coronavirus. According to United’s President, Scott Kirby, it is currently operating under severe planning assumptions. Under these assumptions, revenue falls 70% in April from predicted levels, and then drops 20% for the rest of the year. Under these estimates, United must maintain its liquidity level at $3 billion, which Kirby feels is “necessary to run the airline.”
The pandemic has changed everything for United Airlines. Its focus now must be on survival. United’s total liquidity as of April 29 was $9.6 billion, including $2 billion in undrawn funds under its revolving credit facility. The airline said it expects to burn through about $40 million to $45 million in cash per day in the second quarter.
If we incorporate the $2.5 billion that the company will receive under the CARES Act, and the daily cash burn above, it will maintain its liquidity at $9.6 billion. United currently has a lot of buffers in place, which means it can raise capital if needed. However, if the relative recovery in demand slows done, management would have to slow that cash burn significantly.
United Airlines has already announced that it expects to cut 30% of its workforce starting in October. It’s worth noting that the company was enjoying a resurgence heading into 2020, partially driven by its streamlined cost structure. That structure will come in handy, considering how cost containment is the need of the hour.
The New Reality for Airlines
Social distancing has shaken up businesses across the world. Several companies are now considering what the long-term effects of the pandemic will be on their consumer bases. Especially for airlines, the long-term ramifications could be immense and could reshape their business model forever. Some of the big takeaways include the following:
- Airlines will need to consider new safety measures to avoid packing passengers into tight spaces.
- Demand for business travel will perhaps never be the same given the success of remote work.
- Additional expenses for disinfecting aircraft and related facilities will add to the costs for airlines and are likely to increase ticket prices for the foreseeable future.
United Airlines has sensed these changes, and in doing so, it launched its United CleanPlus initiative on May 20. It has partnered with the world’s most trusted brand in disinfection — Clorox (NYSE:CLX). It has also partnered with top medical experts at Cleveland Clinic to introduced new cleaning, safety and social distancing protocols. United is working with Clorox to redefine its disinfection procedures.
Additionally, the airline will be temporarily closing its self-service kiosks and replacing them with “touchless kiosks” in select locations.
The Bottom Line on United Airlines
It seems as though United’s woes will continue past the second quarter. The mean estimates suggest a per-share loss of $10.15 in the next quarter. However, after that, analysts expect a turnaround. This should coincide with substantial improvement in operational performance.
UAL stock is currently trading at $29.20, which is almost 30% lower than the consensus 12-month price target of $37.48. In short, UAL stock is trading at a bargain. It’s difficult to rely on these consensus estimates right now, so investors should be examining the balance sheet. How the company is maintaining its liquidity targets is of key importance.
Airline traffic is starting to show signs of recovery, but it has done little to convince investors that the sector is getting back on track. United Airlines has done well to maintain a strong liquidity position, and its cost-cutting measures will further strengthen its balance sheet. Moreover, it’s CleanPlus initiative will help improve the confidence of air travelers and help attract revenues in the upcoming quarters.
However, UAL stock is not worthy of an investment at this stage. I would advise investors to play the waiting game until we see a considerable increase in revenues.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.