Shareholders in United Airlines (NASDAQ:UAL) stock wonder if the final stretch of the year will see them recover part of their losses for the year. Like other airlines, the company has found itself in a dire situation due to the pandemic while UAL stock is down over 58% year-to-date.
“The airline industry has faced many threats throughout history, but none quite as rapid and severe as the one posed by the spread of COVID-19,” says Joseph Sobieralski of Purdue University in recent research. “The indefinite timeline for removing social distancing and travel restrictions has increased uncertainty for the industry as a whole.”
Disruptions caused by the pandemic are still affecting the airline industry. Therefore, if you are not yet a shareholder, you may want to wait until you commit new capital into UAL stock. In the coming weeks, I expect the shares to trade within a range between $32.50 and $37.50.
Capacity is Still Muted
Recent checkpoint travel numbers released by the Transportation Security Administration (TSA) reveal important details. On Sept. 9 “total traveler throughput” as reported by the TSA was 616,923, down from 2,005,867 a year ago. On Sept. 2, the International Air Transport Association (IATA) also said, “global demand measured in Revenue Passenger Kilometres (RPK) has retracted by 79.8% in July 2020 as compared to July 2019.”
Amid this grim reality, United Airlines and its peers are planning their schedules for the autumn. In early September, the airline announced plans to fly 40% of its full schedule in October. In September, United plans to operate 34% of its full schedule compared to a year ago
Earlier in July, the Chicago-based airline released Q2 results, which showed wider than expected losses. In fact, management called it the “the most difficult financial quarter in its 94-year history.” Adjusted net loss for the quarter was $2.6 billion. Operating revenue also decreased 87.1% YoY to $1.4 billion, while capacity shrank 87.8% YoY.
In Q2, daily cash burn rate was $40 million as its liquidity was around $15.2 billion. CEO Scott Kirby highlighted how the airlines had completed the largest debt financing deal in aviation history and cut expenses across the business. However, the company may still have to raise additional liquidity in the upcoming months.
Following the results, analysts agreed that while management worked hard to prevent a liquidity crisis, the airline was not out of the woods, yet. In fact, the road to recovery will possibly be long.
What Could Derail UAL Stock?
Over the past year, UAL stock is down around 58%, which means the shares are now deep in a bear market. But while shares are far off their 52-week high of $95.16 in November 2019, they have also doubled since hitting a low of $17.80 on March 18.
I believe that most of the short-term recovery expected of airlines has already been priced into UAL stock. Therefore, any hiccups in broader markets or travel shares are likely to adversely affect the price of United Airlines, too.
In general, investors continue to be optimistic that a coronavirus vaccine could be available soon and help airlines, as well as other companies, get back to a normal demand sooner rather than later. And that optimism has lifted share prices, including UAL stock, since the lows seen earlier in the year.
On the other hand, early September saw AstraZeneca (NYSE:AZN), one of the vaccine-hopeful pharma giants, paused its vaccine trials, due to a registered side effect. Safety issues remain of utmost concern in the efforts to develop and commercialize a vaccine against the novel coronavirus. Unless we have a fully functioning vaccine in the near future, it’d not be realistic to expect passenger numbers, and hence revenue for airlines, to improve any time soon.
The U.S. Department of Transportation provides important information on the net income levels of all U.S. carriers. Those numbers for 2020 clearly reveal the uphill battle airlines are currently facing. If in the coming weeks, we get not-so-favorable data on traffic from the TSA, then a decline in airline shares like UAL stock could also be possible.
The Bottom Line
Turbulent times of the pandemic still remains sky high for airline shares, including UAL stock. Being a contrarian investor when the outlook is bleak could be a possible strategy for some investors.
However, it may simply be too soon to invest in UAL stock for a full and rapid recovery. The coming weeks are likely to offer better entry points for investors.
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
The author has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.
