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Potential Job Cuts Are Just the Latest Problem For United Airlines (NASDAQ: UAL)

Posted on Wednesday, July 8th, 2020 by Chris Markoch

Potential Job Cuts Are Just the Latest Problem For United Airlines (NASDAQ: UAL)

Just as airlines were finally starting to see traffic coming back, many states began pulling back on reopening measures. That’s creating a bigger math problem for the airlines. And United Airlines (NASDAQ: UAL) has been among the hardest hit. UAL stock remains down over 64% in 2020.

Despite receiving enthusiastic demand for its debt offering in June, United announced on July 8 that they are asking employees to take an early retirement package. This is in an effort to blunt the effect of what could be 36,000 job cuts after October 1, 2020. The job cuts will affect mostly frontline workers.

As you may remember, United along with other airlines accepted Federal government funds as part of the Paycheck Protection Program (PPP). The $25 billion that United received ensured the airline would not lay off employees until October 1.

However, that deadline is rapidly approaching. And with uncertainty surrounding exactly when a vaccine for the novel coronavirus will be available, it’s looking more likely that many airlines will have to make cuts.

For its part, United is preparing to issue a WARN notice to its employees. Federal law says employers must provide notice at least 60 days in advance of temporary furloughs. And that’s what United contends these will be. However, the company is also saying the timetable for the furlough is based on demand returning. And nobody knows when that will be.

In May, United’s incoming chief executive officer J. Scott Kirby, told investors. “It would be naïve to believe we or anyone for that matter can accurately predict the course of this crisis or the recovery,” said Kirby. “When we say we plan for the worst and hope for the best, however, we really mean it.”

United Relies On Markets That Were Going to Be Laggards

In fairness to United and other airlines, a global pandemic is not the sort of business case you can easily simulate. A near zero revenue environment is truly unprecedented. And a basic understanding of human nature suggests that demand will return, maybe haltingly, once there is a vaccine.

But when that will return remains an open question. Particularly when it looks like demand will take two steps back after a nice step forward.

And this is particularly problematic for United because they rely on international and business travelers. Demand in these two areas was not likely to return before 2021 to begin with. In the case of international travel, the airline simply can’t fly to many countries. Business travel is likely to be curtailed as companies analyze what portion of their previous travel can be done remotely.

Traffic Statistics and Fundamentals are Largely Irrelevant

The news that more Americans are testing positive for the novel coronavirus continues to dominate the national conversation. And no matter how you feel about that, or what you attribute it to, it’s devastating for the travel and tourism industries.

But this is about more than masks and middle seats. After all, would you want to fly somewhere to find out that you had to be quarantined once you reached your destination? Right now, consumers avoiding flying is simply a common sense solution.

Fool us Twice, Shame on Me

Let’s assume, I’m inclined (or need) to take a flight. Flying has always been a trade-off. But one benefit was that it was a convenient way to travel. It took years for consumers to absorb the measures put in place by the attacks of 9/11. It’s likely that there will be a similar demand curve at work here.

There are measures that airlines will have to take to ensure that they are better prepared for “the next pandemic.” There will be features put in place so that passengers will feel safe flying. In fact, I suspect that within five years, we won’t recognize the inside of an airplane.

But that doesn’t do much for United at the moment.   

The Balance Sheet Doesn’t Tell a Good Story

Up until now, I’ve made the case that fundamentals don’t matter much when it comes to airlines. But right now, I’m not long on any airline. But some investors are looking at United as a speculative play. After all, analysts are giving the airline a price target that suggests nearly 90% stock price growth in the next 12 months.

If you’re one of those investors, let me help dispel you of that notion. United has lots of debt. United Airlines has not offered a dividend since 2001. What does that mean? Servicing that debt will create an obstacle for long-term growth. And you’re not getting a dividend while you wait.

I’m sorry for the remedial lesson for seasoned investors. But right now, without a vaccine, there’s no reason to buy UAL stock. This isn’t about pent-up demand. It’s about an airline that didn’t have a great balance sheet going into the pandemic and for that reason will be one of the last airlines to come back when it’s over.

 

 

Companies Mentioned in This Article

CompanyBeat the Market™ RankCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
United Continental (UAL)1.8$36.36-0.1%N/A-5.93Hold$59.60
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