Just a few weeks ago, it looked like there could be hope for United Airlines (NYSE:UAL). The U.S. economy had reopened, air travel started to pick up and United Airlines stock was within touching distance of $50 per share.
But over the past few weeks, things have taken a turn for travel stocks and UAL has suffered a 32% decline because of it.
Most of the reason for investors’ about-face on United has to do with the apparent resurgence of the novel coronavirus in the U.S. As cases continue to surge in several states, the appeal of airline travel is dropping. Many states are mulling over travel restrictions and countries around the world are coming up with ways to limit travel between countries suffering from outbreaks.
All in all, it’s a terrible environment for airlines and it’s likely to continue for the foreseeable future.
United Stock Hurt By Travel Fears
There’s a good chance that many states may start to ask travelers to self-quarantine for 14 days in order to keep outbreaks from spreading. That would be disastrous for airlines because it creates yet another barrier that will keep people from traveling.
Now that businesses have reopened in the U.S., the thought of being confined to your home for two weeks will likely deter many people from traveling.
But even in the absence of tightened restrictions, United is going to struggle to get people on its planes as long as Covid-19 is a factor. As cases surge in several cities, there’s likely a renewed fear of being enclosed in small spaces with a crowd. As the coronavirus is airborne, sitting in close quarters for hours with a few hundred people isn’t a chance many are willing to take.
Plus, travel within the U.S., which was expected to recover first for United, can be done by car. Sitting solo or with family members, without a mask, makes domestic travel far less risky and will trump the prospect of airline travel for many people.
What’s Next For United Airlines?
With that in mind, United Airlines stock looks like a dud, even in the longer term. The fact that coronavirus cases are surging in the summer, when they were supposed to diminish, suggests an autumn or winter second wave is almost inevitable. At the very least, it’s likely.
There’s essentially no way for UAL to continue operating unless the government offers the airline another cash infusion. That’s because the airlines are heavily leveraged and many of their costs are fixed – they have to pay whether the planes fly or not.
They’re hemorrhaging money every day that the coronavirus keeps passengers from booking tickets.
Government Funding Can Only Go So Far
For now, the government is covering airlines’ expenses to keep them all from going under at once. But it’s anyone’s guess how much longer that can go on. A big part of those expenses is payroll – a large chunk of which is executive compensation. At some point, Uncle Sam might decide that using tax dollars to pay hefty salaries isn’t what its coronavirus bailouts were intended for,
If the next cash infusion includes caveats stipulating how much can be spent on executive pay, we may see quite a few airline bosses filing for Chapter 11, simply because it offers them a better deal than another bailout.
United Doesn’t Have Much Going for Itself
With that in mind, buying United Airlines stock doesn’t look like a good play until coronavirus is under control. As long as flying is a risk and legislators are planning to limit who can enter and when, no airline stock is worth the risk.
There’s a good chance that come September, we see a wave of bankruptcies as the terms for government loans get tighter and the risk of a second wave becomes more apparent. If you have a stomach for risk and you’re insisting on a contrarian play in the airline space, United airlines stock isn’t it.
Southwest (NYSE:LUV) is a much better bet. The company has far less debt and offers a better play on domestic travel, which will probably be the first to recover. Not only that, but Southwest’s lack of business class means the firm probably won’t feel the same sting as its peers if business travel doesn’t return to normal levels in the wake of the pandemic.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.
