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Why Shares of United Airlines Holdings Are Down Today

By Lou Whiteman - May 12, 2020 at 6:25PM

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Boeing's CEO talks down the sector, and one Latin American partner falls into bankruptcy.

What happened

Shares of United Airlines Holdings (UAL 2.88%) fell 5% on Tuesday as the entire sector remained under pressure following comments by Boeing's CEO predicting some airlines would fail. United is under particular duress because an airline it is associated with, Colombia's Avianca Holdings (AVHO.Q), has succumbed to bankruptcy.

So what

Airlines have been among the sectors hardest hit by the COVID-19 pandemic, with traffic down around the globe. That's led to significant retrenchment by the industry, cutting flights and grounding planes, and has left equity holders bracing for the worst.

In a pre-taped interview that aired Tuesday, Boeing CEO David Calhoun predicted a "major" U.S. carrier would "most likely" go out of business this year, adding to investor fears and putting the stocks under further pressure.

A United Airlines jet leaves the hangar at night.

Image source: United Airlines.

United in particular was hit due to Avianca filing for Chapter 11 protection in the U.S. Southern District of New York. The airline, Latin America's third largest, is a key United partner in the global Star Alliance. United also had a financial interest in the airline.

Avianca's filing should not drag United down with it, but it is an added complication for the U.S. airline. United and Avianca have a revenue-sharing joint venture for flights between the U.S. and Latin America, and United has acted as a guarantor on certain Avianca financial instruments.

Now what

United in better times might be interested in stepping in and solidifying the partnership, and its coverage of a key area for business travelers, by shepherding the airline through bankruptcy. But given United's own distressed financial position due to COVID-19, the airline is more likely to be a creditor, getting what it can from the bankruptcy and hoping Avianca emerges revitalized and as a stronger partner.

United is having its own issues raising money, pulling a planned $2.25 billion note offering over the weekend because, reportedly, creditors demanded it pay sky-high interest rates to access the money. That's in part because United had offered mostly older planes as collateral, and the airline could go back to the market again with a better offer and raise the cash, but these are dangerous times for the entire sector.

Whether or not Calhoun's prediction that one of the U.S. majors will end up out of business remains to be seen, but without doubt investors are nervous about what lies ahead.

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Stocks Mentioned

United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
UAL
$36.44 (2.88%) $1.02
Avianca Holdings S.A. Stock Quote
Avianca Holdings S.A.
AVHO.Q

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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