United Airlines(NYSE:UAL) is one of the nation’s foremost airlines with a 14.9% market share in 2019. The stock has been a market darling and ended the last decade posting an impressive 5.8x increase in market cap. Coming into 2020, the market expected robust growth, but little did anyone know about what lay ahead.
The coronavirus pandemic devastated the entire aviation, travel and entertainment sector. Since the spread of the pandemic numerous airline executives have gone on the record to say that the current state of the economy is even worse than it was post 9/11 with demand falling to unprecedented lows. Things got even worse for legacy airlines like American, Delta and United compared to low cost ones due to higher leverage and operating costs. The United airlines stock is down 66% YTD, and that’s after the stock rallied an impressive 24% in two session due to gradual lifting of lockdown and travel bans.
The reality actually is that even when restrictions are lifted, people will be skeptical to close proximity and demand will be low due to to the current economic scenario and will take years at the earliest to recover to pre-pandemic levels.
The airline is currently operating at 20% capacity and is also harmed by the fact that it is one if the largest US operators of the Boeing 737 MAX, which has currently been grounded by the FAA(Forbes). The company is also at a unique disadvantage due being centered at San Francisco, where all mass gathering tech events have been cancelled, and Houston, where the state economy has nose-dived due to the international oil crash.((Motley Fool)
The airline industry being a capital intensive business means that United has been burning between $25 million to $50 million of dollars a day. Earlier in the month, the company made a new equity offering of approximately $1.2 billion at $26.5 a share to maintain liquidity, this was particularly harmful as the offering was made a 5 year low and hurt existing shareholders due to a 15% equity dilution(Seeking Alpha). The airline has so far received about $5 billion in payroll support and $1.5 billion in loans as government funding and also expressed interest in applying for another $5 billion debt from the Treasury department.
Earlier this week, United released its preliminary earnings and declared an expected loss of about $2 billion for the first quarter with revenue of $8 billion, down 17%(InvestorPlace). What makes these numbers particularly scary is that January and February demand was average or slightly below average, meaning that these huge losses were raked up in just a month of low demand, which shows no signs of improving in the near term. Company management have stated that they expect Q2 to be their worst quarter in decades and expect the effects of the pandemic to be stark by means of major losses. Based on these factors, investors should steer clear from aviation stocks till we see more clarity on demand and financial health next quarter.