Few sectors of the economy have maintained their composure amid the spread of the novel coronavirus. And with travel volumes at multi-year lows, the airline industry has suffered major setbacks. Consequently, some shareholders have lost patience with United Airlines (NASDAQ:UAL) stock.
This is the type of situation in which monitoring every news story can drive an investor crazy. It seems like every week there’s been another development surrounding United Airlines and/or the aviation industry generally.
Is it mostly positive news, at least? Not to prematurely give away the ending to the story, but it’s probably best if you keep your expectations low. That way, at least you won’t be disappointed.
Buffett Breaks Rules
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett isn’t known for giving up on his investments. He’s famous for saying that his favorite hold time for stocks is forever. Buffett also usually doesn’t seem to mind if his investments go sour for a while.
As InvestorPlace contributor Wayne Duggan relayed, a pair of Buffett quotes nicely sum up his investing strategy. The first is: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
The second quote is: “The best thing that happens to us is when a great company gets into temporary trouble … We want to buy them when they’re on the operating table.” That’s a powerful statement. Buy, don’t sell, when a great company’s having problems.
But then, in one fell swoop, Buffett went from being a 9% owner of United Airlines to a 0% owner. That’s right: uncharacteristically, the Oracle of Omaha simply gave up and dumped all of his UAL stock.
For investors who follow Buffett’s every word, it must have felt like hearing an English teacher use the word “ain’t.” Worse yet, he can’t provide much insight into how bad things will get for United Airlines. He said, “The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way.”
Job Cuts, Cash Burn
United spokesman Frank Benenati, on the other hand, does seem to offer some guidance into the future of air travel. And if he’s right, it won’t be pretty:
“Travel demand is essentially zero for the foreseeable future and, even with federal assistance that covers a portion of our payroll expense through Sept. 30, we anticipate spending billions of dollars more than we take in for the next several months, while continuing to employ 100% of our workforce … That’s not sustainable for any company.”
Along with the dystopian industry forecast, Benenati is hinting at massive job cuts at United Airlines. And indeed, the company recently announced its intention to eliminate 3,400 management positions in October. United also warned of a “displacement” of around 30% of the company’s pilots.
Backed Away From Bonds
Speaking of unfortunate news, we should also recall that United posted a net loss of $1.7 billion for 2020’s first quarter. United also reported it, “currently expects daily cash burn to average between $40 million and $45 million during the second quarter of 2020.”
On top of all that, the carrier recently abandoned a potential lifeline in the form of a $2.25 billion bond offering. Given the aforementioned rate of cash burn, United certainly could have benefited from a couple of billions plus.
But now the company has backed away from that plan without offering an explanation. We can take an educated guess, though. Insufficient demand for United Airlines bonds probably has something to do with it. And given the unfavorable direction of cash flow, it’s not hard to see why the bonds wouldn’t sell like hotcakes.
The Takeaway on UAL Stock
With a spate of disheartening developments and Warren Buffett himself abandoning hope in the company, the outlook for UAL stock appears grim. And if you already own the shares, it might be time to do as the Oracle did: admit your error, and move on.
David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular YouTube financial channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.