As I previously predicted, air travel bounced back significantly in the U.S. in May. That’s great news for United Airlines (NASDAQ:UAL) and its peers. In the coming weeks and months, there will be many more upbeat developments for the sector, so it’s time to take a look at UAL stock.
During Memorial Day weekend, more than 1.5 million people were checked by the TSA at U.S. airports. That’s more than 87% below the number of people who flew during the same period a year earlier.
Still, as the Dallas Morning News pointed out, it represents “a welcome gain from mid-April, when fewer than 90,000 people a day were getting on planes and many flights held fewer than a dozen passengers.”
Moreover, for many weeks, the number of airline passengers in the U.S. were well over 90% below their year-ago levels. So the sector’s prospects have indeed improved tremendously recently. And in about six weeks, we’ve come a long way from the days when United proclaimed that “travel demand is essentially zero.”
United reported that its cancellation rates had declined and said that “it expects demand for both domestic flights and certain international destinations to improve for the remainder of the second quarter,” CNN noted.
A Closer Look at UAL Stock
Meanwhile, on May 19, just before the holiday weekend, CNN noted that “for the first time in weeks, Americans are booking more flights than they’re canceling, and US airlines are adding flights to their schedules.”
United expects its “scheduled capacity” to drop “about 75%” in July versus the same period a year earlier. But that’s way up from the 90% capacity declines it experienced in May and June.
Further, the airlines, including United, do not have to come close to equaling last year’s revenue to avoid burning significant amounts of cash in 2020 for several reasons.
First of all, like most airlines, United was extremely profitable last year; its net income came in at $3 billion.
Secondly, the company has reduced the hours of its administrative employees and about 50% of its flight attendants have taken voluntary, unpaid leaves. The company is likely to continue to take action to reduce its labor costs.
Finally, as we’ve seen, United is saving money by reducing its capacity, and fuel prices are still meaningfully lower than in 2019.
Given all these points, I think the airlines can stop burning cash if their revenue reaches 40%-50% of 2019 levels.
Many top American attractions, including Disney’s (NYSE:DIS) Disney World and Las Vegas casinos, remain closed. But Las Vegas’ casinos are slated to open in June and Disney World is supposed to open its doors in July.
Meanwhile, the EU just opened its borders to travelers who aren’t EU citizens on May 16, and many European countries are also unlocking their economies.
Further, while most business travel is still anemic, I expect that to change within the next couple of months as the spread of the virus continues to decline and more people realize that the death rates of healthy people below 65 is extremely low.
Additionally, word of mouth should play a role in boosting air travel; as more Americans hear about friends and relatives returning from flying without getting sick, the number of people who are willing to fly will likely jump meaningfully.
The Bottom Line on United Airlines
Demand for flights has already jumped tremendously. That trend should continue, further boosting United’s revenue. Moreover, there’s a good chance that the company’s cash burn rate will be quite low by August or September, eliminating much of the risk posed by United’s shares.
With UAL stock still 60% below its 52-week high despite its recent rally, the shares are worth buying.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned securities, but he owned shares of Southwest Airlines.