United Airlines: Hitting An Air Pocket
Summary
- 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 become the name of the game. In fact, United's guided daily cash burn of $40 to $45 million in 2Q20 is the lowest among the big 3 names (see graph below).
Source: DM Martins Research
Barely responsible play
I would not rank UAL as one of the top airline stocks to buy and hold through the upcoming recession. My rating of the shares is a hold (meaning "not confident about buying or shorting it"), and my position is that there are better options to consider in the space - namely Southwest (LUV) and Alaska (ALK).
Although United has had a less bloated cost structure than its peers Delta (DAL) and American (AAL), its balance sheet was not the most pristine going into the crisis, measured in net debt to assets. Also, the stock has been the most volatile among the top US-based airlines this year, as the chart below illustrates.
Source: DM Martins Research, using data from Yahoo Finance
But unlike AAL, my bearish call in the space, I think UAL could still be considered a (barely) responsible play for those willing to speculate on the sector as a whole surviving the downturn.
Per my estimates, and assuming no other initiatives in the second quarter, United has 288 days of liquidity left in the coffers, putting it on par with Delta (excluding its recent move to secure additional financing) and in a much better position than American. Also, since UAL seems to be the most sensitive airline stock, an eventual sector-wide rebound could benefit it the most.
In conclusion, I keep my hands off UAL for now. But at the same time, I understand why a speculator might want to allocate some "play money" to this stock, provided that the amount is small enough to not severely handicap his or her portfolio in case things go south.
I use an approach that favors predictability of financial results and broad diversification when choosing stocks for my All-Equities Storm-Resistant Growth portfolio. So far, the small $229/year investment to become a member of the SRG community has lavishly paid off, as the chart below suggests. I invite you to click here and take advantage of the 14-day free trial today.
This article was written by
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.
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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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