The news that more Americans are testing positive for the novel coronavirus dominates the news. And while that news is not surprising, it’s devastating for the travel and tourism industries. And that’s the case for United Airlines (NASDAQ:UAL) as well as other major airlines. United Airlines stock fell over 5% on June 26.
This was after a week where the stock got a slight lift on news that the company had enthusiastic demand for its debt offering. This may allow United to raise $6.8 billion in new debt. However this only continues on the less bad theme that I echoed in my last article on United. That is, less bad is as good as the airlines can count on right now.
But with a market that is clearly trading on news of the virus, there’s simply not a reason to buy United Airlines stock.
One Step Forward, Multiple Steps Back
In June, airlines were reporting an increase in passenger traffic as the economic reopening went nationwide. The numbers were exceptional only in the fact that they reflected a reprieve from the absolutely horrific numbers that the industry was facing.
But with cases on the rise, the reopening measures will inevitably be slowed, and in some cases, they may even be reversed.
What is also being made clear is that passengers have a limited range of options to visit. Everybody knew that international travel was going to be non-existent without a vaccine. But there was hope that domestic travel would improve once popular tourist destinations reopened.
That narrative, however, is quickly changing. United won’t be getting help from Disney (NYSE:DIS). Disneyland has already announced it would delay its reopening. Disney World is not expected to be far behind. Live sports may be returning, but it’s clear that fans will not be in the stands, so that won’t be a factor.
And business travel is also not likely to recover. This is particularly true now that several states have imposed restrictions requiring those that travel from a state where the virus is surging to quarantine for two weeks.
Lots of Debt and No Dividend Is Not a Good Combination
But let’s step away from the pessimism. Let’s look at what is likely to happen to United Airlines stock once traffic returns to anything approaching normal levels. The company has taken on a load of debt that it will have to work through.
In the short term, investors have been cheering the move because it makes it less likely that United will have to consider bankruptcy. However, as Alex Sirois wrote for InvestorPlace, that debt is creating an obstacle for long-term growth of the stock. And given the recent dip in United Airlines stock, investors seem to agree.
And let’s not forget that United does not offer investors a dividend. It’s fair to say that most airlines have cut or suspended dividends. However, United has not issued a dividend since 2001. And while the company works through its new debt, a dividend will be the least of its concerns.
I recently wrote about Southwest Airlines (NYSE:LUV) which has a better balance sheet than United. I don’t think LUV stock is a buy and I don’t believe that United Airlines stock is either.
Without a Vaccine, There Is No Reason to Buy United Airlines Stock
Back in May, United’s current president and incoming chief executive officer J. Scott Kirby, gave investors a stark warning. “It would be naïve to believe we or anyone for that matter can accurately predict the course of this crisis or the recovery,” said Kirby. “When we say we plan for the worst and hope for the best, however, we really mean it.”
I have little doubt that there is real, pent-up demand for flying. But without a Covid-19 vaccine or an antibody treatment, consumers are going to stay away from flying. It’s not a question of masks or middle seats. It’s simply a common-sense solution that individuals will make to keep them and their loved ones safe.
The novel coronavirus is not United’s fault. But until there is a vaccine or treatment that makes passengers feel comfortable and, just as importantly, truly reopens the country, United Airlines is a pass.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
