In its recent quarterly report, United Airlines (NASDAQ: UAL) reported that its liquidity condition is stable over the near term thanks to $5 billion in payroll support, $6.8 billion in fresh cash raised from recent debt offerings, and other transactions. While United Airlines’ revenues for the second quarter fell by 87%, the company’s operating losses were offset by $1.5 billion of proceeds from the CARES Act grant. United targets a daily cash burn rate of $25 million for the third quarter assisted by the ongoing structural changes in the airline industry and an uptick in air travel demand. The company expects to achieve break-even cash flow with 50% (y-o-y) contraction in revenues during the fourth quarter and has $9 billion of assets that could be used as collateral for future debt raises (excluding MileagePlus assets and the assets tied up with the $4.5-billion CARES Act loan).
Interestingly, United Airlines’ stock currently has a market capitalization of $9 billion. Therefore, if the company raises additional long-term debt in the near future, its stock could observe steep declines due to a massive erosion of shareholder value. Trefis estimates United Airlines’ valuation to be $30 per share, with an expectation that its revenues will recover almost completely during the first quarter of 2021.
Second-quarter revenues plummeted by 87% but CARES Act grant cushioned losses
- Spurred By Stellar Earnings, Can United Airlines Holdings Stock Extend Its Run?
- United Airlines Holdings Stock Looks Set For A Come Back
- Down 13% Last Week, Can United Airlines Holdings Stock Bounce Back?
- Is United Airlines Stock On The Move?
- Company Of The Day: United Airlines
- Will United Airlines Stock Rise After Recent Correction?
With the global spread of coronavirus and a likelihood of a long-term impact on the Airline industry, United Airlines reported an average daily cash burn rate of $40 million for the second quarter. While lower fuel expenses assisted in cost savings, the company granted voluntary furloughs and unpaid leaves to nearly 26,000 employees and reduced salary expenses by 30% (y-o-y). Also, the $1.5 billion in CARES Act grant during the second quarter led to just $130 million of operating cash outflow. Per its Q2 filings, the company expects to achieve a break-even cash flow mark with a 50% (y-o-y) reduction in fourth-quarter revenues. Achieving the break-even mark will be a breather for the air carrier.
But what if that does not happen?
Is another bailout possible for the airline industry?
The U.S. Airline industry received a $25 billion bailout under the CARES Act to support employee costs for the second and third quarters. If the demand for air travel falls due to a second wave of the pandemic and the CARES Act grant runs out in Q3, the company will require additional funds to support its huge employee costs. While a moderate growth in passenger numbers has eased margin pressure, another round of travel restrictions will be devastating for the already battered industry. Considering the demand of $32 billion in total payroll aid by the six aviation worker unions and the possibility of another stimulus package after the Fed’s $2 Trillion CARES Act Aid, we expect the airline industry to receive government support if the third quarter is again marred by stringent lockdowns.
Recovery in travel demand hinges on an effective coronavirus treatment or a successful vaccine. Our Coronavirus Vaccine Portfolio and Coronavirus Treatment Portfolio highlights the performance of key stocks in the respective fields.