Airline shares were under pressure on Monday after United Airlines Holdings (NASDAQ:UAL) moved to shore up its balance sheet via added debt and issuing more shares. Investors are also getting nervous about a resurgence in COVID-19 cases, putting pressure on travel stocks.
United shares traded down 6% as of 11 a.m. EDT, after opening down more than 10%. Shares of American Airlines Group (NASDAQ:AAL) and Delta Air Lines (NYSE:DAL) opened down 9.9% and 8%, respectively, and were each off more than 3% in late-morning trading, while Southwest Airlines (NYSE:LUV) stock had made up most of its initial 6.3% decline.
The airlines have been scrambling to raise cash as the pandemic slashed demand for travel. United is the latest to move, announcing Monday it plans to raise $5 billion by borrowing against its frequent flier program while also filing to issue and sell up to 28 million shares of its common stock.
The efforts, coupled with receipt of $4.5 billion in U.S. Treasury loans as part of the CARES Act, should give the airline total liquidity of $17 billion by the end of September.
The added liquidity is a plus, but investors were just as focused on the data United provided highlighting why it needs the cash. In a securities filing United said it "continues to see a steady improvement" for domestic and certain international travel, but July domestic capacity will be down 75% year over year and ticketed passenger revenue is expected to fall by more than 80%.
United expects to burn through an average of $40 million per day in the current quarter, and hopes to have that number down to $30 million per day in the third quarter. That could mean further cost-cutting; the airline says it is in negotiations with its unions concerning future staffing levels.
The hope had been that after an initial pandemic-induced shock to demand in March and April travel would steadily improve through the summer and into the fall. If so the airlines should have ample liquidity to ride out the crisis. But a growing number of new cases in tourism hotspots, including Florida, Texas, and California, are worrying investors that we could face a second wave, and further demand issues, in the months to come.
News that China is reintroducing lockdown measures in Beijing after a new cluster of COVID-19 cases was identified is adding to investor worries.
It's good United is able to raise additional funding, which should extend the company's runway and allow it to survive even an extended downturn. Unfortunately, it appears there will be no quick bounce-back and the airlines are in for a multiyear recovery.
Assuming the industry does fly through the pandemic without bankruptcies, the added debt taken on during the crisis will weigh on the airlines for years to come. Given the risks and continued uncertainty, it's no surprise investors are moving to the sidelines until more is known about the direction the pandemic is headed.
For those interested in buying in and hoping for the best, it's best to limit yourself to small positions and focus on the top operators who should be able to survive the longest even if there is no immediate recovery.