After Failed Bond Issue, United Airlines’ Will Be Forced To Avail The Full $4.5 Billion CARES Act Loan

United Airlines (NASDAQ: UAL) has been engaging in various transactions to bolster its cash position as the coronavirus pandemic continues to weigh on its top line. After the failure to raise $2.25 billion from a corporate bond issue, Trefis expects the company to tap into the $4.5 billion in additional loans available to it under the Loan Program of the CARES Act. Notably, the company has also entered into a sale-leaseback deal with Bank of China Aviation for 22 aircraft after raising $1.1 billion from an equity offering in April. In this article, Trefis highlights the airline’s operational performance during the first quarter and the series of transactions it has undertaken to strengthen its balance sheet. Our interactive dashboard on United Airlines Expenses compares the trends in the company’s key expense categories over the past few years and provides a reference for the company’s operating expense for the year.

United Airlines raised $2.8 billion of debt during the first quarter

• A sharp drop in air travel demand resulted in the company’s first-quarter revenues declined by 17%(y-o-y) with occupancy rate falling and available seat miles (capacity) shrinking.
• With travel restrictions and social distancing measures leading to a precipitous drop for air travel, the company raised additional debt and applied for government grants to cover fixed costs in March.
• United Airlines ended the first quarter with $5.2 billion in cash and cash equivalents – including $2.8 billion in fresh debt issued.
• That said, the $2.8 billion of cash from financing activities primarily covered $2 billion of capital expenses and $350 million of share repurchases.
• Moreover, the 17% revenue decline during the first quarter ended up taking the EBITDA margin to almost 0% due to high fixed costs.

The company would burn nearly $4 billion in cash over Q2’20, 80% of the $5 billion in grants

• Per recent filings, the company expects a daily cash burn of $40-45 million during the second quarter, which aggregates to $4 billion of cash outflow in the second quarter.
• In Q2’19, United Airlines incurred $9.9 billion in total operating expenses, with $3 billion in salary costs and $2.3 in fuel costs.
• With employee costs expected to be covered by grant money and fairly low fuel expenses due to a sharp reduction in capacity, United is likely to incur $4 billion of cash outflow due to fixed operating costs.
• With just $1.1 billion from equity offering and a failed $2.25 billion of debt issue, United Airlines is likely to face a liquidity crunch with just $6.3 billion of cash on hand.
• Trefis expects the company to tap onto additional funds under the CARES Act to improve its cash position.

While United Airlines could likely face a liquidity shock, American Airlines’ $24 billion of debt has negatively impacted its stock price – erasing the strong 80% gains in American Airlines’ stock over recent years.

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