United Airlines’ Path Is Uncertain After the Coronavirus
The novel coronavirus devastated the travel industry and dropped the demand for air travel to practically nothing. This has many people wondering if things could possibly get any worse for the travel industry and United Airlines (NASDAQ:UAL) stock.
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Well, it appears that the answer to that question is yes, it most certainly could.
United reported its preliminary first-quarter earnings this week. And the results were even worse than investors were expecting.
The preliminary earnings report showed that the company lost more than $2 billion in the first quarter alone. This not only caused UAL stock’s shares to fall more than 8%, but other airlines took a hit as well.
American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), and other major airlines all fell more than 5%. In total, UAL stock is down more than 70% from a year earlier.
United Earnings at a Glance
United Airlines was the first airline company to discuss the impact the coronavirus has had on its financial performance. All in all, UAL stock is down $2.1 billion in profits, and the company’s first-quarter revenue fell 17% to $8 billion.
This is the biggest financial loss the company has reported since 2008. Analysts had expected that the company’s revenue would reach $8.2 billion.
The spread of the coronavirus eliminated roughly 90% of air travel and sent travel stocks reeling ever since the pandemic began to pick up steam in the U.S. in March. And last week, company leadership warned that the coronavirus would affect the company’s first-quarter performance.
In an April 15 letter to employees, President Scott Kirby and CEO Oscar Munoz outlined the effect the novel coronavirus has had on the company. Kirby and Munoz wrote that demand for travel “shows no sign of improving in the near term.”
The company does expect some government relief through the Payroll Support Program, but this is not enough to fix the lasting effects of the coronavirus.
The Road to Recovery for UAL
United is taking steps to protect the company and its employees during this difficult time. The company secured $5 billion in aid from the federal government, and it applied for $4.5 billion in additional loans.
United also raised funds from BOC Aviation (OTCMKTS:BCVVF) by selling the company 22 aircraft. This is what’s known as a “sale-and-leaseback,” and it’s when an airline sells its planes to another company and immediately leases it back. It’s a common fundraising strategy for airlines since many airlines own hundreds of planes outright.
And most recently, United announced a public offering to raise more than $1 billion. The company is offering 39.25 million shares at $26.50 per share in a deal underwritten by Morgan Stanley and Barclays. This makes it the first airline company to sell equity in order to survive the financial fallout of Covid-19.
The Bottom Line for UAL Stock
UAL’s stock first-quarter earnings weren’t pretty, but its second-quarter earnings will likely be much worse. The company plans to cut capacity by 90% in May, and said it expects to fly “fewer people during the entire month of May than we did on a single day in May 2019.”
Some states are tepidly starting to discuss plans to reopen the economy, but it’s likely that things won’t go back to normal for a while. Customers will be hesitant to fly for a long time, and Wall Street expects that the airline industry could be 30% smaller by the end of 2020.
However, it’s worth noting that Wall Street analysts do give the company a moderate buy rating. Most expect that UAL stock will recover, but it’s unclear how soon that will happen.
Jamie Johnson is a personal finance freelance writer and has been writing for InvestorPlace since mid-2019. She writes for a number of other well-known financial sites, including Credit Karma, Quicken Loans and Bankrate. As of this writing, Jamie Johnson did not hold a position in any of the aforementioned securities.
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