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Looking to Take a Flyer on Airlines? Consider United.

Planes are flying nearly empty, air traffic is down more than 90%, and airlines are losing $10 billion a month. But Citi analyst Stephen Trent says investors should look past the turbulence and buy shares of United Airlines Holdings, which he thinks could gain 57% from recent prices.

Trent maintained his Buy rating on United (ticker: UAL) two days after the airline said it was making deep job cuts, eliminating about 3,450 management positions. Trent trimmed his price target on the stock to $38 from $44. The shares recently traded around $23, down more than 70% for the year.

United has raised sufficient cash and funding to firm up its capital base and withstand sharply reduced revenue through the end of 2020, Trent writes in a note published Wednesday. The company is taking $5 billion in government aid to help cover payrolls through September. United will issue stock warrants to the Treasury and is raising equity, diluting its share count by 17%.

“Management has taken an aggressive approach to cost-cutting with the lowest projected quarterly cash burn rate among the large legacy carriers,” Trent writes. “This focus on capital preservation should provide the company with enough of a lifeline to emerge once the demand environment normalizes.”

United continues to cut flight capacity, which is anticipated to be down 53% in 2020, compared with 2019. But what matters is the demand trend. Trent expects revenue to improve sharply next year as lower fares lure back passengers and consumers regain confidence in flying. At that point, demand should exceed capacity, resulting in higher airfares and more profitable flights. Revenue in 2022 will still be 14% lower than in 2019, Trent forecasts, but United should be back to profitability by then.

Trent expects United to earn $4.15 a share in 2021 and $7.55 a share in 2022. Applying a multiple of seven to eight times forward estimates gets him to a $38 price target.

Investors who buy now need to take a very long view. According to Airlines for America (A4A), an industry lobbying group, planes are carrying an average of just 17 passengers per domestic flight and 29 on international flights. Domestic flights had 85 to 100 passengers in the first two months of 2020, by comparison.

A4A says passenger volume is down 93% as more than 315 million people, or 95% of the population, remain under stay-at-home and lockdown orders. Net bookings—ticket sales minus cancellations—are down 95% from a year ago, and booked revenue is down 101%, “indicating the worst cash crisis in the history of flight is far from over,” the group said in a statement.

Moreover, airlines are taking on more debt and their equity is being diluted. Consequently, “it will take years to retire the newly accumulated debt and to address the sizable interest accrued, thereby limiting carriers’ ability to reinvest in their people and products,” A4A said.

Investors appear to be siding with the bleak outlook. Shares of United continued to drop on Wednesday, down another 3.6%, at $23.24, in recent trading. The S&P 500 was down 1.2%.

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