United Airlines (NASDAQ:UAL) stock could take a while to recover to its 2019 highs. The shares are down 64% so far in 2020. Investors should expect it might take several years for United Airlines stock to climb back.
Cowen analyst Helane Becker told clients in early June that airlines need to reduce their planes by 21%. It will “take 3 to 5 years before we return to 2019 traffic levels,” she wrote.
Other analysts and bloggers have offered similar observations. Long-time Seeking Alpha contributor Bill Maurer argues that United’s 2021 revenue will be just 72% or so of its 2019 revenue. That is down from an estimate of 85% or 2019 revenue back in May. Analysts thought then that the recovery would recover earlier.
Feeling Safe(r) in an Airplane
Meanwhile, Flytertalk, describes analysts and airlines as being “depressed” in relation to an airline recovery. The site refers to a June survey taken by Cowen. The main survey question was when people would feel 100% safe to travel on an airplane.
The average answer was 7.5 months. That is well into 2021. However, this is several months shorter than when the survey was taken in May. In other words, people are getting more hopeful.
The implication is that a vaccine will be a panacea for airline travel. In fact, CNBC quoted Bill Miller of Miller Value Partners as making this exact point. The famed value investor said that by not owning the airline stocks, you are “making a bet against a vaccine.”
Preparing for the Long Haul
United has been taking actions to prepare for a long recovery. On July 9 it reached a tentative agreement with its pilot union for voluntary furloughs and early retirement offers.
Moreover, in a memo to employees on July 8, United indicated 36,000 employees, or 45% of its U.S. front-line workers, could face layoffs on Oct. 1. This is more than a third of its 95,000-strong overall workforce. As CNBC reported, the airline is prohibited from doing this before then based on the terms of its federal aid.
In other words, the company needs to dramatically downsize to lower its cash burn. This is because it does not believe that airline travel will pick up in a significant manner. They expect a slower return to normalized travel.
Common Q2 Earnings Sentiment
Investors should keep these points in mind when they review United Airlines’ earnings for Q2, due out after the bell on July 21.
For example, 14 analysts polled by Yahoo! Finance believe that revenue will be $1.21 billion, down 89% from last year. There’s similar sentiment among those polled by Seeking Alpha. They expect revenue slightly higher at $1.37 billion.
Moreover, Q2 earnings estimates from 16 analysts polled by Yahoo! Finance average negative $9.03 per share. The same poll by Seeking Alpha is an average of negative $9.04.
These results are likely going to mark the trough in United Airline’s pandemic experience. Moreover, investors have already discounted them in the prior write-downs of the stock. Investors have already discounted losses for 2020.
The key issue for investors, though, will be how management sees its outlook for traffic and earnings in 2021.
What to Do With United Airlines Stock
If management paints a rocky picture into the latter part of 2021, expect the stock to take a hit. But they don’t know better than anyone else when a vaccine will appear. In fact, no one knows how long it will take for traveler sentiment to change, once a vaccine emerges.
In fact, the outlook for United Airlines stock probably highly correlates with travelers’ feelings and a vaccine possibility. I suspect that the operating outlook for the airline is of lesser importance, in terms of when the stock will recover.
Therefore, despite all the bad news in the airline industry right now, patient investors may find the stocks recover quickly after a vaccine is introduced. This may end up being well before the airlines actually become healthy again.
So if you are an investor in United Airlines, try to average cost in your holding whenever there is bad news. You may have a chance to do this when United Airlines releases its Q2 earnings on July 21.
Mark Hake runs the Total Yield Value Guide which you can review here. As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities.