This week was a big one for United Airlines (NASDAQ:UAL) as the firm finally came to an agreement with the U.S. government regarding a bailout package. The deal sent UAL stock 7% higher on Tuesday, though the airline is still trading nearly 70% lower so far this year.
The bailout package is certainly something to cheer— it’s aimed at tiding the industry over until air travel can resume and the virus is contained.
By accepting these funds, we have happily agreed to not involuntarily furlough or reduce the hourly pay rates of our U.S.-based team members through Sept. 30, at which point we hope and expect that Americans are regularly flying again
UAL Stock and a Long-Term Travel Dip
While we’ve seen encouraging signs that the novel coronavirus is starting to retreat in many areas, it’s worth noting that the likely reason for that is social distancing.
In the absence of a viable vaccine, social distancing will probably become the new normal. Many, including FOMC member Neel Kashkari, say we can expect to see rolling shutdowns to prevent future flare-ups for the next 18 months.
That’s going to be disastrous for air travel. If lockdown measures are lifted but social distancing is still recommended, air travel is going to be one of the last things to return. Not only because people will be hesitant to fly in close contact with so many people, but also because this period of lockdown has made remote meetings the new norm.
Once the economy fires up again, corporate spending is unlikely to ramp up right away. Business travel will probably be one of the last things to come back. Being forced to work from home has caused many firms to invest in the necessary technology and training that allows for remote meetings.
That will probably stick— even if coronavirus is contained. That’s 12% of airline passengers reduced in the long term. What’s more, business travel is lucrative for airlines, business travelers can account for up to 75% of an airline’s profits on a given flight.
UAL Stock Has a Long Recovery Ahead
So, do you buy UAL stock now that the bailout has been agreed to? I think it’s probably too early. If social distancing continues long after the economy has been restarted, the airlines are going to need a bailout.
While I’ll concede that airline travel might resume in September, I don’t think it will be anywhere near the levels it was pre-pandemic.
This government bailout was certainly a boon for the industry, but I believe it’s going to be the first of many.
There’s another reason I wouldn’t rush out to buy UAL stock on the bailout news— debt. United has $13.37 billion worth of long term debt which gives it a debt to equity ratio of 115.91%. Compared to peers Southwest (NYSE:LUV) and Delta (NYSE:DAL), that’s the highest debt obligation by far. Delta comes in second with a debt to equity ratio of 57.77%.
That makes UAL one of the worst picks while the industry is struggling because not only does the firm have to worry about holding on to employees and keeping operations ticking over, but it also has to service more debt than its peers.
The Bottom Line
Investing in airlines as the world breaks out of the coronavirus crisis is certainly something investors should be considering. The government is unlikely to let them go under and more bailout money is likely in the event that this week’s package wasn’t enough.
With that said, I don’t think it’s time yet. The coronavirus crisis is still largely out of control and without a widely-accepted medical intervention, it could be for some time. Airline travel will be one of the last parts of the economy to recover, so your capital would be better deployed elsewhere.
If you must buy an airline stock, UAL isn’t the best choice. Instead, Southwest, with its modest debt pile and strong position in the U.S. market would be my pick. As travel starts to ramp back up, domestic will likely be first to rise because of its relatively lower cost and worries about international coronavirus containment.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
Written by Laura Hoy.
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