The Ultimate Bailout for United Airlines May Be Bankruptcy

Some investors believe United Airlines can survive without declaring bankruptcy. I wouldn't count on it.

At United Airlines (NASDAQ:UAL), a lot of people are making money on a company that appears dead. That’s all thanks to UAL stock.

UAL stock
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As was said in The Princess Bride, there’s dead and mostly dead. United Airlines is only mostly dead. Mostly dead is slightly alive.

United cut its schedule in May by 90%. This month only 3,000 of 25,000 flight attendants are working. Once its CARES Act bailout runs out in September, massive job cuts are expected.

Yet over the last month the company’s stock is up 100%.

What’s Going on With UAL Stock?

They say a dead cat will bounce if you throw it from a high enough building. At the start of 2020, UAL stock traded at over $85 per share. Even with the latest gains the shares open June 8 at $42.

That’s a market capitalization of $12.3 billion, just over 10.6 times last year’s earnings. If the novel coronavirus can be beaten, and United Airlines can ramp up its schedule, it could become profitable. Investors are looking at the first quarter’s results, with revenue down only 30%, and they see opportunity.

To buy the stock, ignore the June quarter. Analysts expect revenue to be just $1.1 billion. It was nearly $8 billion in the March quarter. The expected loss of $9.56 per share comes to $2.8 billion. The new CEO, Scott Kirby, says his mission is to “get through hell” as quickly as possible.

The Case for Kirby

A big piece of the investing case for United is Kirby himself. He’s a former American Airlines (NASDAQ:AAL) president, and was the No. 2 at United for almost four years. He is known for being aggressive and hands-on.

United ended March with $5.2 billion in cash. It is expecting another $5 billion from the CARES Act, a $3.5 billion grant and another $1.5 billion low-interest loan. Investors expect that, plus cost-cutting moves, to get the airline safely into 2021.

Cutting costs means retiring up to one-quarter of the company’s fleet. Kirby says the remaining planes will be “more efficient” and investors believe him.

Kirby insists the company won’t file for bankruptcy and will keep flying middle seats, instead of blocking them out as Delta Air Lines (NYSE:DAL) and American are doing. “You can’t be six feet apart on an airplane,” he says, and bankruptcy “would be the absolute last thing to do.”

The Growing Risks

Investors are hearing Kirby’s “no bankruptcy” pledge as a guarantee. But he also says he doesn’t want to cut head count, just cut hours and furlough workers temporarily. The CARES Act bailout means there can be no layoffs until October anyway.

Then there’s the question of whether people will fly. Some analysts insist we will. Others say the recovery will take years.

Right now, Kirby and other optimists are assuming that 2021 is something close to normal. If it’s not, permanent layoffs and schedule cuts will be necessary, and United Airlines may indeed run out of cash.

The Bottom Line on United Airlines

The Federal Reserve’s helicopter money has put a lot of cash into investors’ hands. With good prospects priced beyond logic, some of that money is going into long-shot bets.

United is one of those bets.

If the pandemic resumes this fall, as many scientists believe it will, United’s plans for a comeback will be set back. A second government bailout is unlikely this fall, with an election a month away.

The ultimate bailout for any business is bankruptcy. Reduce the debt, cancel the equity, return to business. That’s what happened to the airline industry in the 2000s. The risk of it happening in this decade is very real. But if I’m wrong, you’ll profit.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

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