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United Airlines Warns Pilots of More Furloughs as Air-Travel Recovery Stalls



Several weeks ago, United Airlines (NASDAQ: UAL) sent Worker Adjustment and Retraining Notification (WARN) notices to 45% of its domestic workforce (36,000 employees), alerting them to potential furloughs or layoffs in October. United’s 12,000-plus pilots accounted for 2,250 of the WARN notices.
United Airlines relied on fairly conservative assumptions for future air-travel demand when deciding how many WARN notices to send. Unfortunately, demand trends have been even worse than the company had expected. As a result, United recently told its pilots that it may need to furlough more of them than initially planned — and sooner than it previously anticipated.
In early July, United Airlines warned employees and investors that bookings momentum had stalled out in late June, following two months of rapid sequential improvement. It attributed the trend change to a surge in U.S. COVID-19 cases and related restrictions on travel and other activities.
Indeed, the U.S. has logged an average of about 65,000 new cases per day for the past few weeks, according to The New York Times, triple the amount reported in early June. Meanwhile, the number of people screened at TSA checkpoints has stalled since the beginning of July after more than doubling between mid-April and mid-May and more than doubling again between mid-May and mid-June.
Making matters worse, the summer peak season will start winding down in a few weeks. Outside of prime vacation season, air-travel demand is likely to be significantly weaker, especially because business travel hasn’t resumed yet in a meaningful way. In short, U.S. airlines can’t rely on a robust demand recovery to support continued increases in flight activity later this year.
Image source: United Airlines.
United Airlines is especially vulnerable in the current environment. As a full-service airline, it relies heavily on high-fare business travelers to cover the costs of operating a comprehensive route network. Furthermore, it has far more exposure to long-haul international routes than its network-carrier peers. Most industry experts expect those routes to recover particularly slowly due to their business-travel orientation and restrictions on cross-border travel imposed by many governments.
That means United Airlines may need to shrink dramatically in the near term. In a memo sent to pilots this week, United said that it had initially expected to furlough 2,250 pilots this fall and another 1,650 in 2021. (The additional furloughs in 2021 would likely offset some pilots returning from voluntary temporary leaves next year.) However, that plan depended on demand continuing to recover.
« Because COVID-19 cases continue, and demand improvement remains very slow, we may need to furlough more pilots in 2020, and in 2021, than originally planned, » wrote Bryan Quigley, United’s senior vice president of flight operations. The ultimate number furloughed will presumably depend both on near-term demand trends and on United’s success in inducing senior pilots to take early retirement packages.
Over the past few months, United Airlines has done a great job of limiting cash burn, relative to its peers. Perhaps due to the airline’s substantial exposure to China, CEO Scott Kirby started taking the novel coronavirus seriously long before executives at other U.S. airlines. That led United to adopt a conservative approach to capacity planning, which served the airline well last quarter.
There’s only so much management can control, though. For the third quarter, United expects daily cash burn to average $25 million, including $6 million from debt repayments and severance costs. Barring a significant improvement in demand, cash burn will likely remain significant in the fourth quarter, too.
United Airlines has plenty of liquidity, enabling it to wait for demand to recover. However, its net debt is rising steadily as it burns cash. Moreover, its status as a network carrier with high exposure to long-haul international travel means that demand — and cash flow — could remain weak for several years. Investors looking to bet on an airline rebound should stick to carriers that are positioned to recover more quickly.
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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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