With the capital base now firmed up, United (NASDAQ:UAL) should have sufficient liquidity to withstand any challenges into FY21, but the runway may not stretch too far beyond that, in my view. UAL also remains exposed to a great deal of uncertainty around an international and corporate travel recovery post-COVID, which makes this a rather risky name to own. I like the management team (see my prior bull thesis), but I think the easy money has already been made at this point.

3Q Misses the Mark

United posted 3Q20 adjusted EPS of -$8.16, well below consensus expectations, after accounting for COVID-related adjustments (e.g., ~$415m termination benefits and settlement losses, as well as >$1bn from the CARES Act grant) and other one-offs.

Source: Earnings Release

Driving the EPS miss were revenues down 78% YoY on lower capacity, of which passenger revenues were ~84% lower YoY. Domestic yields were weaker across geographies, down ~12.7% YoY, as United continues to price toward volume. From here, United’s loads likely need to improve significantly from the current ~47.8% (-38.3%pts) before airfares can be normalized. Opex was also down ~36% on an adjusted basis, though much of this was down to lower capacity (and fuel).

3Q wasn’t all bad though – cargo continues to be a resounding success, with sales rising ~49.6% YoY. Management deserves a tip of the hat here – post-COVID, UAL has been the most active US airline in driving cargo revenue, with >6,500 all-cargo flights now in operation. Now, this won’t fully offset passenger revenue declines, but it’s a clear step in the right direction.

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Source: Earnings Release

4Q Guideposts Look Positive

Looking to 4Q, management offered the following guide – total revenues and passenger revenues down ~67% and 72%, respectively, on ~55% lower capacity. Opex is also guided at down 42%, driving daily cash burn in the $15-20m range (vs. ~$25m in 3Q).

I thought it was interesting that UAL is guiding toward breakeven cash burn ahead of Delta (NYSE:DAL) (recall DAL only expects to breakeven in spring 2021). But given UAL’s higher 4Q burn level, this would seem counterintuitive and likely indicates a more optimistic view on the 2021 improvement at UAL (management still expects demand to remain below ~50% of pre-COVID levels pending a vaccine, though). That said, I would not read too closely into these numbers, given the differing cash burn definitions between the airlines.

Liquidity Runway – Not as Extensive as It Appears

For 3Q, daily cash burn was in line with company expectations at $25m, driving a >$19bn liquidity position as of quarter-end. UAL expects to end the year with ~$16-19bn (depending on the CARES Act loan). That all seems good, but I think the United liquidity runway is a lot less extensive than it appears. Given UAL has a ~$2bn bridge maturing in early 2021 (secured by older aircraft), which needs to be repaid, that brings the liquidity position to $15-17bn using end-FY20 guidance. Assuming minimum liquidity is ~$8bn, that leaves an ~$7-9bn cushion relative to the guided $15-20m/day cash burn (i.e., a ~350-day runway in a bear-case scenario).

The Pace of the Corporate Travel Recovery is a Concern

As I outlined in my DAL piece, the outlook for business travel is a concern. Yet, UAL continues to pin its long-term hopes on corporate travel as its “bread & butter” (similar to pre-COVID). The disparity in views around a corporate recovery is telling – UAL believes corporate travel can recover with minimal structural impairment, which compares to DAL guiding toward an ~10-20% impairment. Both companies also differ on the timing – DAL is guiding toward recovery in spring 2021, with a full recovery two years out. This contrasts with UAL’s call for a recovery in late 2021 or early 2022, with a return to normalcy by 2024.

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On a more positive note though, UAL has been flexible in the interim. Case in point – the company’s network is markedly different from its pre-COVID capacity allocation. For instance, UAL continues to add capacity at hubs like Denver and Houston, given the interior hubs are outperforming coastal hubs, as well as point-to-point flying to warm-weather destinations.

Easier Ways to Make Money

Airline stocks are one big unknown (as the contrasting DAL/UAL commentary showed), and post-COVID bounce, I think the risk-reward is a lot less favorable. To be clear, airlines could still bounce along with the industry tide and reopening prospects – in such a scenario, UAL should outperform. That said, UAL’s exposure to international and corporate travel puts it at a relative disadvantage to the low-/ultra-low-cost carriers, while its liquidity runway could come under pressure should things take a turn for the worse. Net-net, I am moving to neutral on UAL. Additional risks include competitive pressures, the Boeing (NYSE:BA) 737 MAX re-certification, and a COVID resurgence.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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