United Airlines (NASDAQ:UAL) stock has been on a tear. Shares had risen by around 60% over the past month before hitting a downdraft this week. It’s not just United either. The exchange-traded fund U.S. Global Jets ETF (NYSEARCA:JETS) has surged by a similar amount. Traders are enjoying a strong, if volatile, uptrend.
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There are several reasons for this. First off, traders are starting to discount the novel coronavirus. While new case numbers are still growing at a considerable rate, the public’s attention has shifted elsewhere, and public health authorities seem less concerned about slowing the virus’ spread. As long as this trend continues, it will support the investment case for United.
In conjunction with that, some leisure travel is starting to come back online. Las Vegas reopened its casinos last week, for example, giving a lift to stocks like MGM Resorts (NYSE:MGM). Logically, if the casinos are doing well, the airlines that bring travelers to the casinos are also going to benefit.
All in all, there’s a real fundamental shift starting to occur for the airlines. However, you have to ask how much is justified. Sure, United deserves to be rallying thanks to improving fundamentals. But at this point, traders have gotten far ahead of the actual pace of the economic recovery. Let’s take a closer look at the company’s financial situation.
Debt Markets Point to Improvement
I’m bearish on UAL stock. But let’s give credit where it’s due. There’s been a real upturn in both fundamentals and sentiment. To see that, let’s look at the credit market. A month ago, United Airlines’ bonds were viewed as toxic waste.
On May 14, United’s 4.8% bonds maturing in 2025 had plummeted to just 48 cents on the dollar. This implied a high chance of the company going bankrupt. At that point, the bonds yielded a mouth-watering 22% per year in the event that United merely survived.
As you might expect in such conditions, United was unable to sell new bonds. In May, it abandoned a proposed $2 billion bond offering due to lack of investor interest. This left investors worried that the company might run out of funds.
Fast forward to today and the picture has changed. Those same bonds are now trading at 84 cents on the dollar and are yielding 9.2%. This is not an all clear by any means, as the bonds traded above par prior to the virus. However, while this price indicates significant remaining stress, it’s no longer demonstrating a high chance of outright bankruptcy.
Passengers Are Coming Back…Slowly
June 7 marked the best day of U.S. domestic travel numbers since the virus started. On that day, more than 440,000 passengers traveled through U.S. airports, according to the Transportation Security Administration. That’s way up from the low of 88,000 passengers that was reached on April 14.
Before you get too excited, however, note that 2.7 million passengers used U.S. airports on June 7, 2019. Thus, traffic is still down more than 80% year-over-year. That makes sense given capacity numbers.
For U.S. capacity specifically, United said last week that they will be up to 30% of normal seat capacity for July. That’s up big from 13% capacity levels in June. Note that this is how much the airline is flying, not necessarily how full the planes will be. Still, United is seeing some opportunities to add back flights for specific destinations, such as airports serving casinos and national parks as they reopen.
For the time being, we have less momentum on international flights, as many border restrictions and closures remain in place. As such, international travel is coming back more slowly than domestic. That said, United announced that it will be flying a 75% reduced international schedule for July. That’s up moderately from June, when they were down 90% internationally.
Verdict on UAL Stock
Things are trending in the right direction for United, from a business perspective. But only modestly. We’re still talking about being down 70% domestically and off 75% internationally through the height of the summer travel season. And remember that airlines are so levered that they need full capacity to make money; this is a single-digit profit margin industry even in good times. So, a loss of 10% of traffic is an existential crisis, let alone down 50%, 70%, or whatnot.
United is losing loads of money right now. As such, it plans to lay off more employees in September once it is no longer contractually obligated to keep them on staff as a stipulation for receiving government aid. This is an airline in retreat, pure and simple.
Sure, things appear to be going well enough that the company will avoid near-term bankruptcy. The credit market is indicating that unless a stiff second wave hits, the worst-case scenarios will be avoided.
But make no mistake, United is still going to lose many years’ worth of normal operating profits thanks to this bust. It isn’t going to be back to business as usual anytime soon. A lot of hot money momentum traders are hoping that the airline stocks will soon return to pre-Covid-19 levels. They will be disappointed.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
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