Don’t Bother With United Airlines When Low-Cost Carriers Are Better Buys

What’s next for United Airlines (NASDAQ:UAL) stock? As with the other major airlines, the novel coronavirus continues to severely depress demand, and that has investors wary.

UAL stock
Source: travelview /

Sure, the carrier has announced plans to boost flights to 40% of capacity in October. But don’t expect any sort of swift rebound. Think of it as more of a slow crawl.

And slow crawl is exactly how Wall Street’s been pricing United shares in the past three months. Back in June, investors got ahead of themselves, bidding up shares more than 100% in a matter of weeks. However, as it became clear a “V-shaped” airline recovery wasn’t in the cards, shares cooled down, treading water between $30 and $40 per share.

So, what does that mean for investors looking to buy this, or other legacy airline stocks today? Although things remain tough, chances are shares won’t fall to lower prices from here. But upside? That remains a challenge.

As United CEO Scott Kirby said last month, air travel will “roar back” once there’s a vaccine. Yet, while there are several candidates that could be ready by the start of 2021, one front-runner just paused its late-stage studies. And, even if we have a vaccine by early 2021, it could be months before it gets widely distributed.

To top it all off, “getting back to normal” won’t guarantee a swift recovery for legacy names like United. With low-cost carriers looking like better rebound plays, there’s little reason to buy into this name today.

Vaccine Delays And Stimulus Uncertainty

Air demand may be slowly crawling back from its nadir. But to really jolt demand and put points into airline stocks like United, we need a viable vaccine. Sure, we have two top contenders in the midst of Phase 3 trials. Yet we may still be quite a ways from bringing one to market.

How so? Moderna’s (NASDAQ:MRNA) candidate may have Phase 3 results ready by year’s end. But the other front-runner, from AstraZeneca (NYSE:AZN), just paused its late stage studies, due to an adverse reaction from a participant.

Simply put, all bets are off as to when exactly we’ll have the “silver bullet” that gets us “back to normal.” And that’s a big problem for the airline space.

Until there’s a game-changer like a vaccine, United and its rivals must contend with continued cash burn. As InvestorPlace’s Divya Premkumar wrote September 1, the $25 billion CARES act stimulus package has managed to keep the industry afloat during the pandemic. But that financial support runs out in a matter of weeks.

Barring an executive order, Congressional gridlock could mean a second bailout doesn’t come out quickly enough. United, along with rival legacy carriers American Airlines (NASDAQ:AAL) and Delta Airlines (NYSE:DAL) anticipate this, and are preparing accordingly with massive furloughs.

Put it all together, and it’s clear that the airline space isn’t in “recovery mode” as much as investors may want to believe. And, if and when recovery starts to accelerate, it could be low-cost carriers, not “old school” airlines, that bounce back the fastest.

Why Low-Cost Carriers Are The Real Recovery Play

Investors may be interested in buying legacy airlines now, with the hope that shares skyrocket once the pandemic is over. But, even after the pandemic is firmly in the rearview mirror, “old school” airlines may continue to struggle.

As I’ve written previously, it’s low-cost carriers like Spirit Airlines (NYSE:SAVE) that are the best ways to play an airline recovery. That’s also the sentiment of airline analysts like Morgan Stanley’s Ravi Shanker, who recently rated low-cost airlines like Southwest (NYSE:LUV) the equivalent to “buy,” and legacy carriers like UAL stock the equivalent of “sell.”

Why are low-cost carriers better plays than “old school” airlines? Chalk it up to revenue mix. Low-cost carriers largely focus on the domestic leisure market. Legacy names are much more dependent on the harder-hit business and international markets.

And with every airline gunning for what’s left of commercial flight demand (domestic leisure), competition is going to be brutal. And with higher cost structures, “old school” carriers like United have little room to compete on price.

In short, why buy United, which faces a bumpier ride to recovery, when you can buy Spirit or Southwest, which face fewer hurdles?

There’s Little Reason to Buy United at Today’s Prices

So, what’s the verdict for this hard-hit legacy carrier? A vaccine remains months away (at the very least). Low-cost carriers appear to be stronger recovery plays than legacy names. Put it all together, and there’s little reason to dive into this stock today.

Sure, UAL stock may not tumble from here. But, the chances of shares rallying higher in the near-term remain slim. With better airline comeback stocks out there, it’s best to hold off on this name for now.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.

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