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United Airlines: Hitting An Air Pocket


  • United's dismal 1Q20 results were not a surprise to anyone. Demand has reached approximately zero and should stay there for a while.
  • The better news: United used to be the leanest of the legacy carriers, and its guided 2Q20 cash burn is the lowest among the top 3 group.
  • I keep my hands off UAL, but understand why a speculator might want to allocate some "play money" to it, provided the position is small enough.
  • Looking for a helping hand in the market? Members of Storm-Resistant Growth get exclusive ideas and guidance to navigate any climate. Get started today »

United Airlines (NASDAQ:UAL) reported dismal 1Q20 results that, to an extent, were widely expected by analysts and investors. Revenues of nearly $8 billion lagged expectations by the widest margin of the past 20 quarters at least, but adjusted per-share loss of $2.57 came in ahead of expectations.

With a very tough first quarter in the rear view mirror, the focus of attention turns to the spring season. The challenge for United will be to remain solvent and afloat long enough for it so see the macroeconomic landscape improve significantly, and global travel return to some kind of "sustainable normal".

Credit: The Business Journals

United's first quarter at a glance

Not a surprise to anyone, United's 1Q20 was very challenging. As described by soon-to-be CEO Scott Kirby, demand during the first few months of the crisis has been approximately zero. Involuntary furloughs and pay cuts have been avoided, "but only temporarily and only partially". Now, United's schedule is down 90%, and the needle will not move until demand recovers.

Passenger revenue and total revenue passenger miles (a measure of traffic) in 1Q20 both dipped 19% YOY, very much in line with the results achieved by the top 3 legacy carriers. Not surprisingly, Pacific travel suffered the most, with revenues down nearly 37%. Although this segment accounted for less than 10% of total revenues, United is still the US-based airline with the most exposure to the region.

On the cost side, CASM-ex (per-unit operating expenses, excluding fuel and other items) spiked nearly 10%, which was also very much aligned with the peer group average. As capacity and traffic sank, unit costs suffered due to loss of operating leverage.

Worth noting, however, United used to be the leanest of the full-service carriers before the COVID-19 woes, which may come in handy now that cost containment has

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This article was written by

DM Martins Research profile picture

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

- - -

Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I am/we are long LUV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (24)

Investing in an airline with a very real BK risk is exactly what 'dumb money' does. Even if the worst does not happen the best outcome will be to park your money in an underperforming asset whether or not passenger levels return to normal. You have debt on top of debt, share dilution and massive fixed costs that will kill earnings for many years. Some people think a return to travel "by next year" would mean a return to past earning levels....wrong.
DM Martins Research profile picture
One could go long the least likely airline to go bankrupt and short the most likely one, or the general sector (ticker JETS). There could be some great source of alpha to be made in these situations, if one gets the bets right.

Today, my long-short play would be LUV and ALK on the bullish side (maybe JBLU), AAL and possibly SAVE (still not too sure about this last one, since it's so volatile/"wild") on the bearish side.

Happy investing.
DAL and LUV have the best balance sheets but AAL is carrying way too much debt for comfort in this environment. If I had to chase this alpha it would be DAL because LUV has the supermax exposure in it's new fleet and THAT risk has not played out yet.
chongkim74 profile picture
All I’m going to say after reading this thread concerning airline industry is this...no matter what price you may buy (now or even later if it sank a little more)...people will come back using air transportation...because we just have to. No matter what within a year we will get the vaccine in mass production. No matter what before that we will have a medicine to reduce or eliminate the COVID-19 symptoms that kill us...buffet took it out to put it somewhere else cuz there are much better opportunities right now...place your bets for up to one year term, whenever u feel like it but the airlIne industry will bounce back...we just can’t go on without it. I got in around $24. Happy hunting~
84% held by institutions with debt on negative watch means we could see massive selling going forward. Simply a bad investment now when you consider the dilution that will come with bailouts and debt equity issues...oh ya and the fact that we don't know when if ever passenger levels will return to 'normal'. What we do know for sure is that their large fixed costs have entered termite mode and they will have to pay back all the new debt out of future earnings. Run don't walk.
Elessar profile picture
What am I missing here? Airlines can fly at 60% and break-even. No one is going bankrupt at break-even with election-year government compassion and support for pandemic-stricken industries. You get to break-even with any combination of:

1) Effective treatments developed

2) Relaxing of social distancing (this WILL be done soon by restless municipalities and eventually NEEDS to be done once medical facilities can safely handle anther spike - trying to move towards herd immunity)

3) Effective Airline policy regarding passenger safety (East Asia and Australia probably have something developing already)

4) Price increases - demand is going to outstrip supply when two out of six rows are blocked off and capacity is 60%

5) More countries begin to declare complete containment and negligible new cases. Routes will begin to open one by one. (This too is happening - AU/NZ bubble)

And ultimately

5) A Vaccine (doesn't need to be mass produced - just the news of trials will be enough)

Even before I got in UAL I was prepared for more bad news! I mean I though for sure there would be a second spike in Asia or Southern Europe by now that would continue to overload their system - but no and the hospitals are emptying...

If I am wrong and the Airlines are still unable to break even at the end of the summer, what does that say for other fun fall stuff like college? football? casual dining? the homecoming queen??? and all the associated supply chains therein?

Yea, no as soon as herd immunity reaches 30% (it will soon without ANY vax) and /or we get some of my aforementioned circumstance, we will simply be on "spike watch" for the next few years and it will be business-as-usual. Albeit with a lot more ventilators and isopropyl alcohol.
captmarkt profile picture
Airlines cannot NOT Shrink to Profitability! This industry's recovery will probably take 3 to 8 years for the return to 4th quarter 2019 levels. If they are lucky! Look at other similar economic downturns.

Warren Buffet invested in US Air in the eighty's, they went bankrupt shortly there after, along with every airline in the USA with the exception of Jet Blue and Southwest. Warren stated that he would NEVER invest in the air transport industry again. I was stunned when he stepped in it again three decades later.

The restructuring and downsizing has already begun. A few, ALK, LUV, might pull it off, maybe even UAL, but why would any investor even risk a dime when there are so many other opportunities with dramatically better returns and much lower risk.

Think AMTRAK! No, the US doesn't need an Aeroflot-Rossiyskiye Avialinii PAO MCX: AFLT 74.78 RUB −0.98 (1.29%) type of monopoly, but just like after the 1978 Deregulation Act, the reset has begun. It took 4 decades for that era to cycle from a few majors to many carriers and back again to the BIG TREE. Over that era, take a look at UAL, DAL, and AA, and ask yourself, can the investment be any better that the last flight you were on. You may think the ride is pretty rough currently, cant get much worse, right? Sure hope you have a tremendous level of persistence.
Elessar profile picture
Buffet did what he did for two reasons...

1) Too big one or more doesn't make it, or makes it but with unsustainable debt - can't just unload one tho

2) The man still is shellshocked 30 years later - he's wrong - this is an act of god, not striking Regan-era airline workers.

UAL can take 100 years to return to Q4 2019 for all I care. I know where I'm getting out... lol
The interesting picture I see developing: UAL fell apart at 88 / 80 dropping to the current t bearish consolidation. If it makes a measured moved of 60 points, UAL hits -40. So either technical analysis is broken or UAL is going bankrupt.
This is all pontification. Only 16% of Americans still have vacation plans per a recent poll because the rest canceled them! So, no, I don’t see air travel being back to normal anytime soon...also don’t forget what awaits you if you do travel on a plane...quarantine, dining in your room as the bars, restaurants, gyms, saunas and pools are closed, and that’s what the plan is for the foreseeable future...good luck in being the flying tube to take people to their dream destinations where the travelers are stuck in their rooms....not going to happen...people are planning on staying home. Don’t fool yourself!
Elessar profile picture
I just don't understand the pessimism surrounding the airline industry. No one is going under because of this - that's ridiculous. Air travel WILL return in some form. Buffet said they MIGHT have more planes than needed... Really? When social distancing and long screening processes are implemented the airlines will need MORE planes! 75% of the public will STILL travel regardless - you see these folks at the beach now! With social distancing onboard that will cut capacity by 50%. They will need more flights...period. Fuel costs mitigated for at least 12 - 18 months will help too. Restaurants with tiny margins fixed leases and a business model of packing people in? College campuses? No theres far too much pressure to get back to normal and far too much research into treatments and a vax.
Very well said, Elessar! Plus, after this lockdown ridiculousness ends, the “staycation” will be a thing of the past. Nobody will ever want to spend more than a day or two off at home. And the road trip? Ha! Parents who are coming apart at the seams managing kids at home aren’t about to get in the car with them for 8-10 hrs. Air travel will come back with exceedingly quick.

My suggestion is to lock in these low prices on tickets while can. Won’t last!
Lol! I guess it never hurts to be optimistic.
Things like hemorrhaging ~$50M a day, large capex, 95% reduction in volume etc. have a way of creating gaping wounds that make the airline industry susceptible that others are just not.
When the airlines come back and they will they will all come back together. Their routes in the US have been intermingled for years. No one airline is going to step up to shine and leave all the rest behind. Before all of this their prices had reached such a level with little or no dividend outside of the big boys had little use to play. Different story now. Forgetting dividends the likes of United and Alaska have a lot of upside. Stock pickers market. Long UAL / ALK / DAL. Small positions.
tell Warren Buffett. who just bailed out of the airlines. that's all we needed now will have hell to pay with the stock
davenchop profile picture
actually today was prob the bottom for the airlines.....
DM Martins Research profile picture
@davenchop Time-stamping your comment... if you're right, you'll earn instant legend status! :-P
This was a non article considering the is long LUV!
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