The COVID-19 pandemic has crushed air travel demand this year, causing airlines to burn through cash rapidly. United Airlines (NASDAQ:UAL) has been no exception. While United has been quite aggressive about grounding aircraft and slashing costs to mitigate the impact of the virus on its financials, its heavy reliance on long-haul international travel and business travel made it particularly vulnerable to the disruption from COVID-19. Those factors also point to a slow recovery for its business.
That makes it critical for United Airlines to maintain a strong cash position, to ensure that it can survive the current crisis regardless of the future course of the pandemic. With some recently announced financing moves, the airline is finally close to reaching this goal.
United needed to lock in more funding
At the end of the first quarter, United Airlines had $5.2 billion of unrestricted cash and investments on its balance sheet. It also had $2 billion of availability on its revolving credit line.
As of late April, the airline expected daily cash burn to average $40 million to $45 million during the second quarter and continue (albeit at lower levels) in the second half of 2020. Furthermore, as of March 31, United had $4.8 billion of debt and lease liabilities due within a year. Thus, it clearly needed more cash.
The $5 billion of payroll support that United Airlines is receiving as part of the CARES Act has gone a long way toward offsetting near-term cash burn. A $1.1 billion stock offering in April also helped shore up the balance sheet. But neither was a complete fix. In early May, United attempted to raise an additional $2.25 billion of secured debt backed by older aircraft, but it had to cancel the offering after the poor quality of the collateral led to weak demand. This forced the company to go back to the drawing board.
A new plan to bolster liquidity
Last week, United unveiled a new financing plan that should enable it to end the third quarter with at least $17 billion of liquidity.
First, like its peer American Airlines, it plans to tap into the value of its loyalty program to raise new secured debt. United's MileagePlus program generates over $5 billion of cash sales in a typical year, and annual EBITDA has held steady between $1.7 billion and $1.9 billion in recent years. Cash flow has held up well during the pandemic, as many miles are sold to third parties like credit card companies, and redemptions have plunged due to the lack of travel demand.
United Airlines plans to borrow $5 billion secured by the MileagePlus program. Since the collateral will include the cash accounts where partner revenue is deposited, the risk of loss will be quite modest for creditors. That in turn should enable United to issue debt at a fairly low interest rate.
Second, United Airlines plans to access the $4.5 billion secured government loan that it is eligible for under the CARES Act. The company believes that its unencumbered slots, gates, and route authorities are valuable enough as collateral to cover the full $4.5 billion it wants to borrow.
Third, United plans an at-the-market offering of up to 28 million shares of stock. While there's no guarantee that it will ultimately sell that many shares -- or at what price -- the offering could potentially raise another $1.1 billion based on the stock's recent trading price just shy of $40. This sum is not included in management's estimate that liquidity will total $17 billion at the end of next quarter.
Good moves, but investors should steer clear
United's liquidity-enhancing moves -- which total over $10 billion -- will put the company in good position to weather the COVID-19 pandemic. However, that doesn't mean investors should rush to buy United Airlines stock.
For one thing, it will likely be years before United's profitability returns to previous levels. As noted above, the company's heavy reliance on long-haul international travel and business travel could make it one of the last airlines to recover fully from COVID-19. Its lack of dominant hubs will aggravate this issue, as United may face vicious price competition in many markets over the next few years.
Furthermore, even when profitability does recover, United will have more debt than it did before the pandemic, when it already had above-average leverage among U.S. airlines. It will also have substantial capex needs, as many of its aircraft are nearing retirement age. And assuming United Airlines issues the full 28 million shares contemplated for the at-the-market offering, pre-coronavirus shareholders will have had their stakes in the airline diluted by 22%.
There's certainly plenty of upside for shareholders if United can return to profitability and pay down the debt it is taking on in 2020 relatively quickly. However, that's a big if. Considering the level of uncertainty about United Airlines' prospects over the next few years, investors should look elsewhere for better opportunities.