United Airlines (NYSE: UAL) is the fourth-largest US consumer air operator with nearly 15% domestic market share. It is one of the United States’ four legacy airlines, all of which have been facing stiff competition from low-cost carriers such as Southwest (NYSE:LUV) and Spirit (NYSE:SAVE). In 2020, the company has been one of the companies on the long list casualties of the coronavirus.
As the pandemic spread across America causing an explosion of infections towards the end of March, the aviation sector has taken an unprecedented hit due to air traveler volumes dropping as much as 95%.
For Q1, the company declared an operating revenue of $8B, a pre-tax loss of $1 billion, and a net adjusted loss of $639 million, meaning an EPS of -$2.59. The management of the company announced that all forward planning and decisions were being made assuming a net-zero passenger scenario for 2020. The company has decided to cut costs by eliminating technology initiative costing $300 million, infrastructure costing $60 million, reducing marketing expenses by $60 million, and other expenses worth $75 million.
United has received $5 from the Government under the CARES Act, $3.5 billion in payroll support, and the rest as a low-interest loan. At the end of Q1, United had $9.6 billion of liquidity, into account $2 billion of undrawn credit and the government support.
The company also has un-levered assets worth about $10 billion, including $8 billion in airplanes and parts and $2 billion in routes, slots, and gates (Seeking Alpha). The company had also planned a $2.25 billion bond offering but has decided to cancel it due to high financing costs (Bloomberg). The management expects cash burn for Q2 and Q3 to be roughly $40 million a day and Q4 to be an impressive $20 million.
Given that the company is extremely well-positioned from a liquidity standpoint and all decisions are made assuming an unlikely worst-case scenario, the company presents a risky but high upside investment when demand returns. Also, over the last week passenger volumes nearly doubled when compared to end of April.