What happened
Shares of United Airlines Holdings (UAL -0.08%) fell more than 14% earlier in the day as investors continue to weigh the significant challenges facing the industry. As of 4:20 p.m. EDT, the stock was down 8%. Airline stocks enjoyed a multi-day rally last week as Congress finalized an industry relief bill, but United issued a dire warning after markets closed Friday that caused that momentum to collapse.
So what
Airlines have been hit hard by the COVID-19 coronavirus pandemic, which has caused travel demand to fall to near-zero. United and other airlines have responded by cutting flights and grounding aircraft, but no amount of cost cutting is enough if there isn't revenue coming through the door.
Lawmakers earmarked $50 billion in loans and grants for the industry as part of a broader $2 trillion economic stimulus plan designed to help the airlines weather the storm. The money comes with restrictions, including prohibiting layoffs or furloughs through Sept. 30.
Image source: United Airlines.
In a message to employees after markets closed Friday, United CEO Oscar Munoz and President Scott Kirby said the assistance "buys us time to adapt," but warned that if traffic doesn't return by the fall, they would have to consider deeper cuts when the prohibition on layoffs ends.
"If the recovery is as slow as we fear, it means our airline and our workforce will have to be smaller than it is today," the executives wrote.
Now what
It's hard to criticize management for trying to be as honest and transparent as possible when addressing workers, but it would have been nice for Munoz and Kirby to at least let the ink dry on the bailout bill before talking about what could come next.
Their warning is fair, however: If traffic returns once the pandemic is under control, the airlines now have the financial runway to survive the downturn and restart operations when the time comes. But if travelers don't return in the months that come, these airlines will have to start making some of the temporary cuts more permanent.
That's a worst-case scenario and isn't necessarily what will happen. But the warning, if nothing else, should be a reminder to investors not to get ahead of themselves post-bailout and assume airlines will gain altitude from here. I think the industry will be able to fly through this storm, and there are attractive valuations available for those willing to buy in, but it is best to stick with the top operators if you are brave enough to go hunting for bargains.
