United Raises, Saves Cash for Remainder of 2020
After a difficult first quarter and decline in revenue, we are maintaining our fair estimate for the no-moat firm.
No-moat-rated United Airlines (UAL) reported a difficult first quarter, as the COVID-19 pandemic has ground air traffic to a near-halt. We had previously priced in a difficult 2020 and are maintaining our $38 per share fair value estimate. Revenue declined by 16.8% year over year, and the firm generated a net loss of $6.86 per share. Managements’ priorities are raising and conserving cash. On raising cash, the firm raised $4 billion from three loan facilities, received $5 billion in support from the government, and has access to an additional $4.5 billion loan from the government. We respect the need for the firm to raise capital to survive in an unprecedentedly challenging operating environment, but we expect that additional debt capital from 2020 will increase financial leverage for the foreseeable future. On conserving cash, the firm is working to reduce the daily cash burn from $50 million a day at the end of March to an average of $40 million-$45 million per day in the second quarter.
We’re expecting 2020 revenue to decline by over 50% due to substantially reduced demand, and since a substantial portion of the firm’s cost base is fixed, we are anticipating a 2020 operating loss of over $7 billion. While it’s difficult to say with any certainty when air traffic will return, we are confident that demand will eventually bounce back. We’re modeling demand beginning to normalize in 2021 and that the firm will reach 2019 capacity levels once again in 2022. We think the primary risks to airline investors are increased leverage and equity dilution as airlines look to bolster solvency while demand is in the doldrums. United Airlines came into this crisis with a good bit of leverage, and we’re anticipating that the firm will need to take on even more debt to continue operations. As debt accounts for much of United’s enterprise value, we caution investors that small changes to our assumptions can lead to considerable changes in the firm’s equity value.
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Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.