United Airlines (NASDAQ:UAL) stock and that of the entire airline industry, took a sharp dive heading into the weekend of June 20-21. Investors and analysts alike are fearful of a new outbreak in well-traveled states, which quickly reflected in airline lower share prices. This fear will surely cool bullish industry and United Airlines pundits. But for how long? Fundamental changes did not cause Airlines to rise so sharply as of late. Over-optimism, hastened by fear of missing out, caused investors to pile on. But this optimism is underpinned by mounting debt. And that debt is growing.
The Markets Had Been Bullish United Airlines’ Stock
And that’s why it’s difficult to see why so many bulls existed prior to this most recent outbreak. It had risen to nearly $49 a share on June 8, after dipping below $20 mid-May. The United stock was never particularly strong, nor a better choice than others in its industry. And just last week, United Airlines announced a plan to introduce more liquidity into its balance sheet. The markets seem to be forgetting that all of this new debt is going to be hanging around for a long time. If all this seems like a warning, it is. If you’re waiting for a ‘but’, don’t.
United Airlines will have years and years of reckoning to navigate out from under all of this debt. Long-term UAL investors quick to place the blame on the pandemic, are bound to see this pattern repeat. United Airlines and its stock are in for a long, rough ride.
New Debt Issuance Should Cool UAL Stock
United Airlines just issued $9.5 billion of new debt in order to remain liquid. It feels like not much has changed even though things are opening back up. The primary concern for the company remains shoring up more liquidity to survive. The company has secured this liquidity from two sources. $4.5 billion of the liquidity will come from the CARES Act. United Airlines is putting up its slots, gates, and routes as collateral assets to finance the deal.
The other $5 billion is coming from its loyalty program, MileagePlus. The company believes that all totaled, it will have $17 billion in liquidity by September 2020. MileagePlus is a big earner for the company. The recent 8-K it filed in relation to this debt offering, reiterated the fact that 12% of United Airlines’ 2019 revenues flowed from MileagePlus operations. The exact figure was $5.3 billion in revenue with an EBITDA of $1.8 billion and a 34% margin. If United Airlines could have held onto that, they would have. The company will have less control thereof, and new obligations related to that asset moving forward.
Clearly the company’s previous debt issuance was insufficient to see it through 2020.
How Will This Affect UAL’s Price Moving Forward?
Investors hopefully will pause and undertake a bit more due diligence moving forward as it relates to United Airlines. The dip that capped off the end of last week hopefully raises some eyebrows. Fundamentally, some should now be asking themselves what really caused United Airlines to peak over $48 per share as recently as June 8. Was it their strong balance sheet coming into the pandemic? Clearly not, because they were near the middle of the industry pack in that regard.
Reports of virus spikes caused share prices to drop, but was that the only reason for trepidation around UAL and airlines? Doubtful. Investors in the company believed it could rebound quickly and share prices would rise fast. However, debt fueled the optimism.
This latest round of news makes it clearer that a return is not going to be as smooth as airlines would have hoped. United Airlines’ ballooning debt means that the company is becoming less and less able to return profits to investors. I think it is a sell and the company’s debt is fueling that, yes. But also none of this even considers United Airlines’ routes which are heavily international and slower to recover.
As of this writing Alex Sirois does not own shares in any of the aforementioned stocks.
