In 2020, airline stocks were some the hardest hit by the pandemic. A year ago, would you have predicted that United Airlines (NASDAQ:UAL) stock would be outperforming some of the top tech and EV stocks in 2021?
Somehow that’s happening. Tech and EV stocks have been in correction territory since February, wiping out billions in market capitalization. Meanwhile, UAL stock opened the year at $43.68 and is currently trading at more than $55. That’s around 27% growth so far in 2021. But I still wouldn’t buy it.
The rise in United Airlines stock got a big boost last November when the first novel coronavirus vaccines were approved. And that’s the problem. The recovery of United Airlines (and UAL stock) is dependent on a return to pre-pandemic travel. I just don’t see that happening any time soon. In the case of business travel, there may never be a return to normal. UAL has had an “F” rating in Portfolio Grader for some time, and an “F” it remains.
Will Business Travel Resume?
Consumers getting vaccinated then spending money on travel and vacations after being cooped up for a year is a distinct possibility. American consumers who were lucky enough to keep their jobs stockpiled cash during the pandemic. The government has started sending out $1,400 stimulus checks. President Joe Biden just announced a planned return to “normalcy” by July 4.
All that could work in the favor of airlines like United.
Even if everything goes without a hiccup, it doesn’t address business travel. This segment is critical for the airline industry. On average, a small percentage of passenger volume is for business travel, but it is much more lucrative for airlines, accounting for 60% to 70% of revenue. High-margin business travel also accounts for a super-sized chunk of airline profits.
With videoconferencing taking the place of business travel, companies have seen their travel costs slashed. No hotel rooms, no dinners out, no rental cars, no staff unavailable because they’re on the road. And no high-priced business class airline tickets. The feeling is that many companies will be reluctant to start spending that kind of money again now that they know it’s not necessary.
Bill Gates has already predicted that business travel will only bounce back to 50% of pre-pandemic levels. Chris Anderson is a professor at Cornell University’s School of Business Administration. He’s more optimistic, but still thinks 25% of business travel is gone for good.
“For the most part, we’re super productive in this model. And so I think that what that means is, there’s going to be some hesitation in the business sort of side of things to go back to the way things were.”
Last fall, United Airlines’ CEO spoke about the importance of business travel to his airline:
“Business travel is incredibly important, really important. It was our bread and butter before I think it will be our bread and butter in the future.”
When asked how far down the road that might be, his prediction is 2024.
Think about that. The CEO of United Airlines – trying to drum up support for his company – is looking at 2024 for a recovery of the airline’s “bread and butter” business. That does not sound optimistic. Assuming he is correct and business travel does eventually recover (something many experts have doubts about), it’s three or four years in the future. Until then, United will struggle to return to profitability. UAL stock will face a long, uphill road to recover to pre-pandemic levels.
Bottom Line on UAL Stock
Despite a year-long recovery, UAL stock remains cheap. It’s still worth nearly 40% less than it was before the pandemic. And it’s been one of the performance highlights in 2021, a year that’s been marked by a tech stock sell-off and a correction in many EV stocks.
However, that positive trend hides the fact that there is a ceiling to this recovery, at least over the next three to four years. Investors have been betting that air travel will return to normal and then all will be well for United Airlines. That’s an optimistic take. Better days are undoubtedly ahead, but there are many challenges yet to face, and a great deal of uncertainty. In particular, business travel is a red flag. The company faces operational challenges and had to make investor-unfriendly concessions in order to stay afloat.
Assuming that UAL stock will remain on its current trajectory seems like a very risky assumption.
The investment analysts polled by the Wall Street Journal currently have an average 12-month price target of $51.15 for UAL stock. In other words, there’s not much faith there that UAL shares are going to continue making gains through 2021. There’s nothing wrong with keeping a close eye on airline stocks in 2021, but now is not the time to be looking at United Airlines or its competitors as as growth opportunity just waiting to be snapped up.
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.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.