Few sectors have been hit as hard by the novel coronavirus pandemic as airlines. Maybe cruise lines, but at this point that’s small consolation to investors in companies like United Airlines (NASDAQ:UAL), who have seen their shares lose much of their value. There are huge challenges ahead, and the recovery is expected to take years. However, after dropping below $20 earlier this year, the worst may be over for UAL stock.
An Airline Industry in Disarray
When the coronavirus pandemic hit, the aviation industry took the full force of the impact. Planes were grounded and passenger numbers plummeted. The International Air Transport Association estimated the global loss of revenue for airlines in 2020 could hit $113 billion.
In May, it was reported that United Airlines had reduced its national flights by 78%, and international flights by 89%. In addition to flying some planes nearly empty to maintain service and parking much of its fleet, United has had to deal with the added expense of deep-cleaning its planes between flights.
A Miserable Q2 for United Airlines
On July 21, United released its second quarter earnings. The impact of the pandemic was on full display. Calling it “the most difficult financial quarter in its 94-year history,” UAL posted a loss of $1.63 billion for the quarter. To put that in some perspective, in the same quarter last year, United posted a $1.05 billion profit. Revenue for the quarter was $1.48 billion, a steep drop from the $11.4 billion in revenue reported in Q2 2019.
In other words, it was a miserable quarter. That was hardly unexpected, and the punishment netted out by the market (UAL closed down 4% the next day), was a mere blip compared to the hits it’s taken this year.
Big Challenges Remain, But Some Positive Signs
The first half of 2020 has been nothing but bad news for United Airlines. However, there are signs that the airline has weathered the worst of the pandemic’s impact. There have been several developments that give investors hope that United Airlines stock bottomed out when it dropped below $20 in May.
At the start of July, the company announced demand has increased enough that it is adding 25,000 domestic and international flights in August. That’s just 40% of the total flight schedule from August 2019, but triple its number from June. Several weeks ago, United reached a deal with its pilots. An early retirement package is being offered, along with voluntary furlough programs. United and the pilots’ union reached an agreement that will avoid layoffs when CARES Act funding runs out at the end of September.
In its Q2 earnings report, United projected its daily cash burn for the third quarter will drop to $25 million from the $40 million a day it burned through in the second quarter.
The last time the airlines had to deal with anything nearly this bad was after the 9/11 terrorist attacks. Fear of flying at that time resulted in flight capacity being down for the next three years. Airlines didn’t return to profitability until six years after. So it would be disingenuous to suggest United Airlines is out of the woods. However, with passenger volume and demand slowly picking up, and cash burn slowly improving, there’s a faint light at the end of the tunnel.
Bottom Line On UAL Stock
Ultimately, the only way that United, or other airlines like American Airlines (NASDAQ:AAL) are going to have a hope of permanent recovery is for an effective coronavirus vaccine to be developed. Many biotech companies are getting close, but even then, there could be months, if not years, before enough people are vaccinated to effectively eliminate the coronavirus risk.
And after that, it could be several more years before air travel returns to anything resembling the 2019 normal.
The question is, did United Airlines already hit rock bottom? Shares have been bouncing around between $30 and $40 for the past six weeks. Even after the unpleasantness of those Q2 earnings. That suggests the stock has pulled out of its tailspin.
The investment analysts surveyed by CNN Money think the worst is behind for United. That’s not to say there won’t be turbulence ahead — when the CARES Act funding runs out it’s not expected to be pretty — but indicators like daily cash burn, number of flights, and passenger volume are currently moving in the right direction. Not many of those analysts would recommend buying UAL shares due to the uncertainty in the sector, but they do have a $40.00 median 12-month price target.
That’s less than half of the $89.70 United Airlines stock hit in January, but still offers a tidy 27.5% upside if you’re not averse to some risk.