What happened
United Airlines Holdings (UAL 5.50%) went on a shopping spree this week, and some on Wall Street are worried about how the airline will pay its bills. Shares of United traded down more than 10% this week, according to data provided by S&P Global Market Intelligence, after the carrier announced the largest wide-body order in U.S. aviation history.
So what
The pandemic was difficult on the airline industry, but United and its rivals have seen demand come roaring back this year as vacationers try to make up for lost time and business travel slowly resumes. United CEO Scott Kirby has gone so far to suggest the post-pandemic world, with more work flexibility, could be a boon to the carriers, allowing for more travel during what has traditionally been down times for the industry.
United has one of the oldest fleets in the business, but the airline is taking steps to change that. This week, the company placed an order for 100 Boeing 787 Dreamliners, with options for 100 more. At list price, that order is worth around $35 billion.
That's a massive commitment for United, which like most airlines took on significant new debt to survive the pandemic. BofA Securities estimated that the Dreamliner order, plus a separate order for smaller 737 MAX planes, will boost United's 2023 and 2024 capital expenditures to $20 billion from $14 billion before the order.
BofA Securities cut its United target price to $36 from $40 following the order and kept its underperform rating on the shares.
Now what
It is important to note that airlines rarely, if ever, pay list price on an order this big. Given that Boeing is struggling to dig out from its own pandemic-induced debt issues and is eager to move metal, United likely got a deal on this order. Deliveries are also staggered over a number of years, and United likely has some flexibility to defer deliveries if economic conditions worsen from here and the economy turns south.
If demand remains strong, United is among the best-positioned airlines to take advantage of a recovery thanks to its focus on higher-margin business travel. The Dreamliners United will add to its fleet will help the airline to save considerably on fuel costs compared to older jets, and the modern cabins should be a selling point for large corporate customers.
But the order clearly does create an added burden on United's effort to clean up its balance sheet. By BofA's estimate the airline's net debt will soar to as much as 4.2 times earnings by 2024, compared to pre-pandemic norms of just over 2 times earnings. Investors going along for the ride need to hope that the airline can steer away from any additional turbulence in the years to come.
