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United Airline Stock Still Isn’t a Buy

United Airlines (NASDAQ:UAL) stock has given up a good amount of its recent rally, as fears of a second wave of Covid-19 exposures have gripped the overall market. In June 15, United Airlines entered an agreement for a shelf offering of 28 million through a syndicate led by Citigroup Global Markets Inc.Bank of America Securities Inc. And J.P. Morgan Securities Inc. United Airlines also used their frequent Flyer program to back a new $5 billion loan.

With these most recent capital raises, there is hope that their liquidity needs will be covered until at least September. After that, no one knows how the industry will navigate a protracted reduction in demand.

During the first quarter of fiscal year 2020 earnings call on May 1, there were clear steps taken to improve United Airlines stock’s position. CEO Oscar Munoz laid out the passing of the torch to the four-year veteran, Scott Kirby. Scott brings over 25 years of airline experience, with four different firms.

United Airlines Stock Aims for Friendlier Skies

United Airlines is doing what many of the other major Airlines have done. They are reducing capital expenditures, eliminated planned share repurchases., and reduced all non-employee expenses. These moves are expected to have had the impact of reducing cash burn to $40 million to $45 million per day by the end of the second quarter. Based on capital raises, and the CARES Act, they anticipate the same liquidity when they exit the second quarter.

On the employee expense side, they hope not to be placed in to a position to furlough employees. Payroll decisions are on hold until Sept. 30, which is the agreement they have made with the government.

In the first quarter, United Airlines lost $1.7 billion in net income, which was the first quarterly loss since the first quarter in 2014. However in an interview by CNBC on May 20, CEO Scott Kirby expressed confidence that demand would recover. He doesn’t expect pricing structure changes, due to cost efficiencies they have made. This will bode well for shareholders, who are willing to accept some short-term volatility with the expectation of an award in the end. 

There are some signs demand is picking up, Zack’s Equity Research believes.

“UAL is witnessing steady improvement in demand in its domestic markets as well as in some international destinations. There has been more than 70% reduction in customer-cancellation rates from the highs in April. Consequently, ticketed passenger revenues (a component of passenger revenues, excluding ancillary fees and frequent flyer revenue among other things) are expected to rise nearly 400% in June from that in April.”

If United Airlines can continue on this trajectory, they could see a good bounce, having come into the Coronavirus pandemic with a weaker balance sheet compared to the other major airlines. Nevertheless, it will be a long-road to prosperity. Longer-term, there is consensus flights will be flying under capacity, which means they will be less profitable. If you were already in United Airlines, and you had a nice recovery in your position, it would be good to take some profits. However, if you don’t have shares, I still don’t see a reason to invests into the airlines.

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