While United Airlines (NASDAQ:UAL) is well off its highs, it’s still one of the largest U.S. air carriers. Sporting a market capitalization of $5.6 billion, UAL stock is the third-largest airline behind Delta Air Lines (NYSE:DAL) and Southwest Airlines (NYSE:LUV).
I previously looked at Southwest Airlines, as it was the best-performing airline stock amid the novel coronavirus pandemic. I also looked at Delta, which had some of the best financials of the group. No wonder these two stocks command a market cap that’s more than double United Airlines’ at the moment. They’re standing at $14 billion and $12 billion, respectively.
I’ll get to the numbers in a minute, but first, what did Boeing (NYSE:BA) CEO David Calhoun say earlier this week?
Putting aside the company’s own issues for a minute, he made some chilling commentary on the airline space. Calhoun argued it’s unlikely that 25% of the prior normal airline traffic will have come back by September. That figure may only be at 50% by December, while a U.S. airline may go belly up this year.
Will UAL Stock Be the First to Fall?
Unfortunately, Calhoun’s commentary represents a dark outlook for the airline space. Combined with Warren Buffett’s decision to exit his four notable investments in airline stocks due to limited future upside, it’s bleak at best.
Fortunately though, it’s not likely going to be UAL stock that goes under this year — if any of them do.
The company is quickly seeing its free cash flow turn south. On a trailing basis, UAL stock has seen its free cash flow drop from $2.4 billion at the start of the year to just $190 million as of the most recent quarter. That’s a ton of cash burn to drag that figure down so significantly, so quickly.
However, at least it’s still in positive territory, unlike American Airlines (NASDAQ:AAL) and Spirit Airlines (NYSE:SAVE).
On April 30, United reported a first-quarter non-GAAP loss of $2.57 per share, beating estimates by 47 cents. However, a GAAP loss of $6.86 per share was a startling figure for investors to see. As was the 16.8% year-over-year slump in revenue to $7.98 billion, missing estimates by $230 million.
By the end of Q2, United expects its daily cash burn to average between $40 million and $45 million. Taking the midpoint of that guidance, we can assume about $3.8 billion in cash burn for the quarter.
The company said it had about $9.6 billion in total liquidity as the end of Q1, so it should be OK for now. There’s been a slight rebound in airline traffic — as noted in the graphic above — but it’s still down significantly.
That’s the case with United too, with the company saying it sees a 90% drop in its May schedule. Further, it anticipates a similar drop for June as well.
Trading United Airlines
The truly unfortunate part is the timing of the outbreak. The upcoming two quarters — Q2 and Q3 — are far and away United’s two best quarters of revenue.
While Q1 and Q3 free cash flow tend to be around the same amount, Q1 generally edges out the later quarter. However, Q2 is by far UAL stock’s biggest free cash flow quarter. It essentially generates the majority of its total annual free cash flow in that one quarter alone.
So, to know that Q2 is going to be a disaster and Q3 could be a mess, is a big concern. To that end, it’s no surprise that the airline stocks continue to struggle.
Above is a daily chart of UAL stock highlighting its stunning fall this year. On the plus side, shares aren’t making new lows. However, UAL is still down tremendously, is not participating in the broader market rally and remains below both downtrend resistance and key short-term moving averages.
For bulls to have a chance, they need to see UAL stock maintain $21.50. A close below this mark — which is essentially the April low — puts the 2020 lows near $18 in play. To have any momentum, bulls need to see UAL stock close above downtrend resistance and the 20-day moving average. Until it does, lower prices could be on the way.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.