Shares of United Airlines (NASDAQ:UAL) tumbled after the company made what can only be considered an inevitable announcement. Whether it will be enough to salvage United Airlines stock is another question altogether.
On July 8, United told its 36,000 employees in a series of meetings that continuing losses from the novel coronavirus pandemic may result in mass furloughs. Such a move could happen as early as Oct. 1, when staffing restrictions imposed by United’s government loans via the CARES Act expire.
A 1988 federal law known as the WARN Act requires companies to give employees 60 days’ notice before a mass layoff, so the company will be going through that process in the coming days.
The Wall Street Journal, quoting an unnamed senior executive, said that mass furloughs would be a last resort. The company is giving notices to 45% of United’s personnel in the U.S., including 15,000 flight attendants, 2,250 pilots and 11,000 service workers.
The warnings of possible mass layoffs came just two days after United disclosed that the massive drop in business will continue well into the third quarter.
United said that its year-over-year capacity in June was down 88% and is likely to fall 75% in July and 65% in August. While those numbers are improving, it’s not fast enough to appease impatient investors.
The Coronavirus and United Airlines Stock
Investors need to come to grips with the reality that the Covid-19 pandemic isn’t going away any time soon, at least in the U.S. While many countries around the world are reopening, cases in the U.S. are now over 3 million and the rate of infection seems to be increasing daily.
Countries around the world are reopening because they imposed rigid restrictions and had aggressive testing protocols in the spring that helped them flatten the curve and get a handle on the virus.
But in the U.S., mixed messages from the federal government led just to confusion. President Donald Trump turned the pandemic response into a political question and many of his followers resisted social distancing and stay-at-home efforts. States that opened too early or failed to impose even basic restrictions are the most extreme hot spots in the U.S. today.
Even today, the president rejects guidance from the Centers for Disease Control and Prevention on basic issues such as whether people should wear masks and precautions needed for students to return to school.
With such a haphazard response, its no wonder that hospitalizations from Covid-19 are climbing to dangerous levels in some states. And it’s no wonder that the European Union, in announcing plans to begin allowing foreign travelers, pointedly are keeping Americans from its borders.
Investors who had hopes that the airline industry would rapidly recover have to face the facts – it is going to be a long, slow recovery for the industry. Even after scientists find a Covid-19 vaccine, it will take time for the vaccine to be mass-produced and put into general circulation.
United Airlines stock has actually performed better than its peers during the pandemic in recent weeks. Since early May, UAL is up 22%, while American (NASDAQ:AAL), Delta (NYSE:DAL) and Southwest (NYSE:LUV) are all up roughly 12%.
But now that reality is smacking investors in the face, United has no choice but to find ways to trim costs and shed payroll. Sadly, it will have no choice but to lay off as many as 36,000 employees if its to protect share price and maintain solvency.
The Bottom Line in UAL Stock
United recently issued $9.5 billion in new debt, including $4.5 billion from the CARES Act and $5 billion from its loyalty program, MileagePlus. All in all, United is expected to have $17 billion in liquidity by September.
That funding, combined with the layoffs that the company will almost certainly be forced to impose, will help United get through this shaky period.
Ideally, the airline will be able to trim enough costs and see a recovery begin in 2021 that will allow it to avoid bankruptcy. While long-term investors may find a bargain in United Airlines stock in the coming months, short-term investors would be wise to avoid airlines in general right now.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he was long DAL stock.