As much as everyone wants to know when it will feel safe to fly again, investors wonder when they can soar once more with shares in United Airlines (NASDAQ:UAL). For those who currently own United Airlines stock, this much is certain: The so-called friendly skies have been pretty empty lately.
With shares down 63% for 2020, UAL stock is in the same tough spot as other companies in the travel, entertainment and hospitality industries. The novel coronavirus pandemic has ravaged all these sectors — and if we’re indeed headed for a dark winter, it may no longer be a question of whether things get worse for the airline industry but rather by how much.
Asking UAL investors to hold on and have faith is a tall order, even if there’s cold comfort in knowing that what’s affecting them has shaken all of aviation. Yet United has moved aggressively to cut costs and tough out the pandemic, sending signals Wall Street likes thus far. Is this enough for United Airlines stock to clear the current turbulence? Or will all flights to Profitland circle the runway until further notice?
No More Winging It
The air travel sector is in peril. No matter what United or other airlines have previously done to address Covid-19, experienced travelers can’t get certain memories out of their brains. We’ve all been shoehorned next to some bugger sweating like a gorilla in heat and/or sneezing their head off. And that recirculated air? Heathy and fresh as a soiled sweat sock. If you don’t have a story about getting sick after a long flight, you definitely know someone who does.
All too aware of this, airlines are desperate to lure customers back and United is no exception. If you own UAL stock, rest assured the company has taken a fairly aggressive stance in this regard. United has just announced that effective Nov. 16, it will begin a four-week trial of free coronavirus tests to passengers on selected routes. CNN reports that these flyers must take a rapid molecular Abbott Laboratories’ (NYSE:ABT) ID Now test, which can produce results within 20 minutes.
Those who test positive won’t be allowed to fly — and a successful trial could serve as a bellwether for how air travel will work in 2021. United is sending a smart message here: “We’ll test every passenger to make sure that no one on board has Covid-19” (though seat mates who sweat like fertile primates are another story).
If it works, the program can only have a positive impact on United stock, though the company’s financials give a much more complete picture.
How United Airlines Stock Could Take Off
Yeah, UAL had a pretty lousy third quarter. United’s earnings report showed that year-over-year, operating revenues nosedived 78% and passenger revenue was down 84%. How can a company in those kinds of dire straits make shareholders happy? While that might sound like a pipe dream, United Airlines stock has a few things going for it that deserve notice.
The third quarter report highlighted measures United is undertaking to stabilize itself through a crisis not of its own making. It has minimized cash burn by reducing total operating costs by 59% compared to the same quarter last year, while raising more than $22 billion through commercial debt offerings, stock issuances and CARES Act funding.
So, while investing in the airline sector may sound absurd right now, analysts see things differently. Currently, a third (seven of 21) call UAL stock a buy; the vast majority, a dozen, label it a hold. This produces a consensus rating of overweight, with a price target of $42.18, nearly 25% above the current $33.86 per share.
Remain in a Holding Pattern
For a legacy airline that’s had more than its share of public relations disasters and high-profile failures (remember Ted?), United is doing impressive work with all its constituencies, from employees to passengers to investors.
The trouble as I see it has nothing to do with United. It stems from the news that nationwide and worldwide, Covid-19 cases are on a rapid rise. No matter how safe it is to fly once again, the U.S. is weathering new wave of restrictions and lockdowns. In Chicago, the home of United’s headquarters, restaurants and cafes have been once again ordered to serve only for takeout effective Oct. 30.
True, a worsening pandemic could crater share prices and thus offer a rare buying opportunity. But in the parlance of aviation, some headwinds simply aren’t safe for flight — and there’s no telling how the winter months will elevate Covid-19 to unimaginable levels.
Just as air traffic control would put its flights on standby, I encourage you to hold on United Airlines stock until the winter months run their course. At that point, let’s hope the pandemic wanes and UAL shares are clear for takeoff.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.