Amid the mess that the novel coronavirus created, navigating the airliner industry has been rough going. On one hand, the pandemic has been catastrophic for United Airlines (NASDAQ:UAL), which like its rivals suffered severe demand erosion. However, new daily cases have been declining since hitting a fresh peak several weeks ago. Should investors take a crack at UAL stock?
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It’s a tempting proposition. Since Aug. 11, UAL stock has noticeably sold off. While that’s discouraging in terms of confidence toward immediate upside viability, it does give patient investors a better entry point. Shares have roughly returned to where they were trading in late June. Further, United has a strong footprint in the airliner market that will be difficult to upend.
However, my InvestorPlace colleague Will Ashworth has a rather dim view on United’s prospects. For its second quarter, Ashworth noted that the company forecasts it will only burn $25 million in cash every day, which amounts to “38% less than its daily burn rate in Q2 2020.”
“Woohoo! The worst is behind it.” To clarify, that was sarcasm.
Not unlike many other analysts, Ashworth isn’t wholly convinced about the airliner comeback. However, he stresses that if you had to pick an individual name in this sector, you should go with Southwest Airlines (NYSE:LUV) or Delta Air Lines (NYSE:DAL). Fundamentally, they’re better bets. With UAL stock, you’re dealing with a much more troubled picture.
Recently, the options market signaled volatility ahead for United Airlines shares. This isn’t necessarily a negative forecast: UAL could make a big move in either direction.
Still, I would be cautious. Certain data indicates that consumers are still worried about the coronavirus.
If Fear Reigns Supreme, Do Not Buy UAL Stock Just Yet
At some point, this awful pandemic will fade. That means many of the investments that analysts are currently negative on will receive the green light. In the meantime, you should probably sit on the sidelines in case a steeper discount avails itself. Likely, this is the best approach for UAL stock.
In my last article about JetBlue Airways (NASDAQ:JBLU), I noted that “only testing can save” the company. To summarize my main point, air passenger volume has picked up considerably since the March and April lows. What hasn’t picked up, though, is the miles flown per passenger.
In March and April of this year, average miles flown per capita was a little under 1,200 miles. In May, when nominal passenger volume increased noticeably, the average miles flown dropped staggeringly to 542 miles.
From this data, I surmised that people who choose to fly during this pandemic are doing so because they must. Otherwise, if they were flying for vacation or business, the average miles flown should be higher.
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Source: Chart by Josh Enomoto
I don’t think this is anomalous data. For instance, UAL stock and air ton miles of freight and mail shared a strong correlation coefficient of 76% between 2006 through 2019. Suddenly, this correlation flipped into a negative coefficient of 42%. This means that as air freight/mail miles increased, UAL shares decreased in value.
Why is that? Again, it’s my speculation but people are scared to fly. Not only that, they’re scared to do much of anything. Therefore, whatever people can get online, they did. And that’s why you saw an explosion of air freight but an erosion of UAL stock (and other airliners’ securities).
For further confirmation, just look at the dramatic acceleration of e-commerce sales as a percentage of total retail sales.
The Airliner Industry Needs a Confidence Boost
Not too long ago, Russian President Vladimir Putin announced that his country produced the world’s first novel coronavirus vaccine. In a style typical of communist-friendly nations (see China), Putin expertly trolled the U.S., availing Russian services for vaccine development assistance.
But do everyday Russians want to take Putin’s vaccine? That would be a hard nyet, according to the Daily Beast. So Aeroflot, which I guess is the Russian equivalent of United Airlines, is likewise having trouble in the equity markets.
Say what you want about vodka-swigging, bear-wrestling Russians. Probably, most of their consumers are just as scared to board an airplane like we are.
That tells me that fear of the coronavirus more so than any other factor is hurting UAL stock. Unless we have a nationwide testing mechanism at our transportation hubs, I don’t see the airliners appreciating much from here.
That or until the coronavirus fades away on its own. Something tells me that we’re not unlike the Russians when it comes to vaccine acceptance, either.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.