You know the United Airlines (NASDAQ:UAL) story for 2020. After the novel coronavirus pandemic decimated air travel, UAL stock ended the year down 52% compared to its January 2020 open. That dismal performance was aided by a two-month rally that pushed shares over $40 after spending much of the year below $35. Some optimists are looking at UAL as a bargain right now, assuming the arrival of effective vaccines will revitalize air travel. However, I would be very careful about falling into that trap.
Where to start? United was among the airlines that accepted government CARES Act funding. That money came with limitations on future stock buybacks and dividends. Borrowing to stay afloat, United has accumulated billions of dollars in debt.
The vaccination program that is sparking such optimism isn’t going to happen overnight. The U.S. may well spend most of this year vaccinating citizens, and until the program is complete, “normal” will remain elusive. It’s no surprise that UAL stock earns an “F” in Portfolio Grader, but there are even more reasons to be wary.
Don’t forget we are in a recession. During tough economic times, flying is a luxury that many people give up. After the 2008 recession ended, it took UAL stock five years to recover to pre-recession levels.
If you are considering picking up UAL shares on the cheap right now, keep history in mind. Even once the pandemic has been overcome, leisure travel may take a long time to resume.
Business Travel May Never Bounce Back
My biggest concern about the plight of airlines is the future of business travel. Airlines have come to rely on business travelers for a big chunk of their profit.
Business travelers tend to book on short notice, they pay extra for more comfortable accommodations, and prior to the pandemic they flew a lot. According to industry figures, business travel accounted for 30% of bookings before the pandemic struck but generated as much as 60% to 70% of airlines’ revenue.
In 2020, business travel was largely replaced by videoconferencing. The technology has proven to be very effective. Yes, some deals are important enough that companies will still want to send representatives in person to hammer out details or inspect facilities. However, it’s difficult to image that companies will return to pre-pandemic levels of business travel.
Videoconferencing doesn’t just save huge amounts of money on flights (plus hotels, food, car rentals, and entertainment). It also means staff are more available when needed, instead of spending days scattered across the country or on another continent.
None other than Bill Gates thinks that the pandemic has permanently changed the way companies do business. He predicts that over 50% of business travel will “go away” even once we’re back to normal life.
One challenge airlines face hasn’t had the same level of attention during the pandemic, but expect it to become a bigger issue going forward. 2020 saw some real turning points in terms of recognition that action must be taken to combat climate change. Electric vehicle (EV) stocks are going through the roof, oil companies are in trouble, and Joe Biden won the presidency with a key New Green Deal platform that promises a “clean energy revolution.”
Consumers will be a big part of this. Environmental impact will play a larger role in the products they buy and the companies they support. As Mark Milstein, clinical professor of management at Cornell and director of the Center for Sustainable Global Enterprise put it during a 2020 conference on sustainability:
Consumers are not passive observers – they are playing a critical role in how companies address sustainability in the marketplace.
Airplanes are a problem. Airlines have been investing in more fuel-efficient planes, but they are still big polluters that emit millions of tons of the greenhouse gas carbon dioxide. A recent study estimated that at pre-pandemic levels of growth in air travel, aviation would account for a whopping 25% of the world’s carbon budget by 2050.
A push for greater sustainability will result in some consumers choosing to forgo air travel to reduce pollution. Companies will also be under pressure to reduce business flying to cut their carbon footprint.
Bottom Line on UAL Stock
I think I’ve made my case for caution when considering an investment in UAL stock. Sure, it’s cheap. 52% cheaper than it was last January, in fact. But that doesn’t mean now is the time to snap it up.
United Airlines is not a company that’s in a position to recover quickly from the pandemic. Any recovery — and that’s by no means a guaranteed thing given the challenges the airline industry faces — is likely to take years.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.