While the markets were in bull mode, United Airlines (NASDAQ:UAL) stock still did not do very well. Note that the shares are close to their 52-week low, which was set in mid-March. For the year so far, the stock has tumbled a grueling 73%.
But could UAL stock provide investors with a value opportunity? Could the markets be overreacting? In normal times, that would seem to be a good bet. But of course, we are not in normal times. The novel coronavirus has destabilized the airline industry.
Airlines’ traffic volumes are off by over 90%. Yet they are still flying many planes, often because of contractual obligations. The result is that the industry is burning huge amounts of cash.
Gauging what may ultimately happen is extremely complicated, if not impossible. But I think we have gotten one major sign and it is far from positive. Specifically, Berkshire Hathaway’s (NYSE:BRK.B) Warren Buffett recently unloaded his 9% stake in UAL stock. He also sold off his positions in Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV) and American Airlines (NASDAQ:AAL).
Here’s what Buffett had to say: “The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way.”
The New Reality for the Airline Industry
Going forward, it seems like airlines will need to rethink how they board and seat passengers. They may, for example, have to keep the middle seats empty. But of course, that would lead to much less revenue generation.
For United in particular, we have already seen an example of how this can go awry. One of its flights that departed from Newark, New Jersey last weekend was actually packed! Photos of the flight have since gone viral on social media platforms like Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB).
One of the passengers was a doctor had gone to New York City to help treat coronavirus patients. But after the flight, he said he would not be flying again for quite some time.
It’s important to note that United did provide the flight for free to the healthcare workers. Yet this incident shows that the airlines really need to be more proactive when it comes to social distancing if they want to get customers more comfortable with flying. If they don’t do that, the industry’s recovery may be prolonged.
The Bottom Line on UAL Stock
In its latest quarterly report, United announced a staggering $1.7 billion net loss, and its cash burn rate was tracking at about $45 million per day. While the government’s money will be a big help, the company will likely need more assistance from Uncle Sam. United may also have to continue to borrow more money and issue more stock.
But those steps will not be easy. Keep in mind that United recently abandoned its $2.25 billion bond offering. The company did not comment on this issue. But the Wall Street Journal reported that the terms of the offering, “including a higher interest rate and more protections for investors in case United defaults,” were just too harsh for the company.
In the meantime, United has been aggressively cutting its costs. Yet some of its spending reductions could have long-term negative consequences.
But it really has little choice. The incoming CEO of United, J. Scott Kirby, said: “It would be naïve to believe we or anyone for that matter can accurately predict the course of this crisis or the recovery. When we say plan for the worst and hope for the best, however, we really mean it.”
That is certainly the right strategy. But then again, the outlook is far from encouraging for UAL stock. In other words, it’s probably best to just follow Buffett and stay away from the shares.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.