Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Why United Airlines Stock will Crash

United Airlines (NASDAQ: UAL) is crashing before our eyes. In 2020, United Airlines shares have lost over half their value.

In detail, Mr. Market paid $89.74 for UAL on 2 January 2020 and $34.49 on 16 July 2020. Therefore, investors have lost all their faith in United Airlines because of coronavirus.

Investors are not the only ones with no faith in United Airlines. For instance, BGR’s Andy Meek admits; “You couldn’t even pay me to fly United or American Airlines (NASDAQ: AAL) right now.”

Meek is afraid to fly United because he thinks you could catch coronavirus on its flights. Meek thinks United and American flights are dangerous because they are full. Hence, passengers cannot social distance and protect themselves from COVID-19.

Is Air Travel Dead?

I think fears such as Meek’s make impossible for United to make money from passenger flights. Nobody will fly because they are afraid of coronavirus.

Under these circumstances, I cannot see how United Airlines could attract enough passengers to make money. For instance, the Transportation Security Administration (TSA) estimates the number of US air travelers on 29 June 2020 was 25.46% of the passenger volume in June 2020.

Thus I calculate US air travel fell by 75.54% between June 2019 and June 2020. Although the number of air passengers rose from 87,534 on 14 April 2020 to 625,235 on 29 June 2020. Thus airlines’ passenger business is one fourth what it was last year.

Is United Airlines Finished?

Consequently, United Airlines Holdings Inc. (NASDAQ: UAL) plans to furlough 45% of its workforce.

To elaborate, United notified 36,000 of its US employees they could lose their jobs after 1 October 2020, NPR reports. October 1, 2020, is the date the federal government will stop underwriting United’s payroll. Congress guaranteed United’s payroll in the CARES Act.

United admits it cannot pay 45% of its workforce without government help. Thus, I no longer consider United Airlines a viable company. However, I think Congress will renew the CARES Act before October because Congressional elections are scheduled for 3 November 2020.

Thus, United Airlines is a zombie company that cannot survive without government support. Under those conditions I predict United could become a junk stock. Thus I expect the $34.49 Mr. Market paid for UAL on 16 July 2020 to be a fond memory for investors by September.

Is United Airlines a Junk Stock?

United Airlines (NASDAQ: UAL) made money before coronavirus. For instance, United made a $5.62 billion gross profit on revenues of $7.979 billion the quarter ending on 31 March 2020.

However, United reported a -$972 million operating loss for the first three months of 2020. In contrast, United Airlines reported an $861 million quarterly operating income for the last three months of 2019.

Moreover, Stockrow estimates United’s revenues shrank by -16.79% in the quarter ending on 31 March 2020. To elaborate, United’s quarterly revenues fell from $10.888 billion on 31 December 2019 to $7.979 billion on 31 March 2020.

Predictably, United’s quarterly net common income fell from $641 million to -$1.704 billion in the same period. Therefore, coronavirus devastated United Airlines in the last quarter.

United Airlines Borrowing to Survive

Moreover, United Airlines’ quarterly cash flow fell from $1.181 billion on 31 December 2019 to $63 million on 31 March 2020. Given that number, I predict United will report a negative operating cash flow for the next quarter.

Conversely United reported a $3.548 billion ending cash flow on 31 March 2020. That ending cash flow grew from -$195 million on 31 December 2019.

However, I think United Airlines borrowed most of that cash. To explain, United reported a $2.189 billion financing cash flow on 31 March 2020. The financing cash flow represents the money a company raises by selling debt or borrowing.

What Future does United Airlines Have?

Therefore, I think United Airlines cannot survive without borrowing or government support.

I predict the federal government could end up owning United Airlines. Remember, the federal government owned General Motors (NYSE: GM) for years after the 2007-2008 Meltdown.

I think Uncle Sam could own United and other airlines for over a decade. I believe government ownership is inevitable cause United can only cover its payroll with federal help.

I suspect Congress will bail United Airlines out because no politician wants another 45,000 unemployed voters in the country. However, politicians will face a vicious public backlash from suffering ordinary people who see wealthy companies being bailed out.

Can United Airlines Survive?

Interestingly, United Airlines could have enough cash to reorganize and preserve a portion of its business.

For instance, United Airlines had $5.211 billion in cash and short-term investments on 31 March 2020. Frighteningly, I believe United Airlines will have to spend all that cash and eliminate half of its workforce to survive.

I believe there is one certainty here. I think United Airlines (NASDAQ: UAL) share price will collapse.

Given that possibility, I advise investors to avoid United Airlines. I predict this stock will crash and keep crashing to under $10 a share. I think United Airlines proves all airline stocks are junk, therefore investors need to stay far away from airline shares.