bocastephen

Obviously you're missing the point - it doesn't matter what it trades at, there is no magic crystal ball that you are affording stock and debt traders. They are taking a guess, based on a rosy outcome, which at this point is based more on wishful thinking than material fact. If you are claiming that debt traders can magically see into the future thus rendering their current valuations somehow factual, then I have nothing more to add, because that theory is Jack Nicholson-crazy. UAL stock, like UAL debt, is trading based on nothing more than forward looking wishful thinking that two vaccine booster shots will magically cure all the ills of the airline industry and everything will be coming up roses in the near future.

There is a very long bumpy road to traverse before we even know what 2023 is going to look like. The only thing I agree with UAL about is, there is significant pent up demand for travel (on the leisure side), but even a $29 fare is not tempting enough for me to venture on board just yet.

ChurnieEls

I'm not missing the point at all, what I'm saying is that there are professional folks who do this for a living who don't see Ch.11 in UA's future.

You clearly do, based on what appears to be a hunch without any empirical evidence or support. I know whose side I'd prefer to be on in that argument.

jsloan

We've discussed this before. Money is fungible. Unless you think that UA employees would have worked for free absent the bailouts, you can't simply wave them away and say "it was simply passed through to the employee base" and so therefore it didn't help them financially. And the handouts only dilute the equity holders if the Treasury exercises its warrants -- the low-interest loans that have been offered don't dilute anything. Furthermore, a Biden administration may be seen as more likely to provide no-strings-attached bailouts.

I'd say there's a fair case to be made for either side.

UA's business is built on high-margin customers. You can point out all of the vacation destinations that you want, and it doesn't matter: UA can fill their planes with leisure travelers, and they will lose money. And activating the Singapore flight because people want to fly to Thailand makes as much sense as activating an IAH-SEA flight because people want to go to Yellowstone.

Well, that's option (A). On the other hand, someone could easily get into UAL, debt or equity, because it appears that the government is accepting the risk. That's what happens when something is Too Big To Fail.

Let me put it to you this way. UAL traded over $90 per share in November, 2019. What if I told you that you could buy a share of stock at $41 now and sell it at $82 in 2024, for a 100% profit (26% annualized), and the government would keep the company afloat if COVID remains a problem? At that point, you're really just betting that UA's forecast of 2019 margins in 2023 is accurate.

I agree, but that's not the same thing as saying that they're going to return to profitability quickly.

bocastephen

I completely agree with this - my historical position being the following:

1. UAL unjustly and negligently rewarded shareholders with excess cash that should have been invested for future growth, and to sustain an almost certain to come downturn in travel at some point in the future. Now none of us could have imagined in our nightmares what has transpired over the last 12 months, but let's be certain that a downturn was going to come at some point, and that cash would be needed to handle the downturn. Was it Crandall who said decades ago that the easiest way to make one million in the airline business was to start with ten million? Everyone who has been in the airline business long enough knows that downturns are guaranteed at some point and airlines with sufficient resources can work their way through these periods.

2. Given what happened in point 1. above, the US Government has no business bailing out an airline who acted this irresponsibly without imposing consequences on that company, specifically to address the source of that irresponsible behavior - and the mechanism to achieve this is the forced filing of CH11 to eliminate that shareholder equity in its entirety, eliminate all management golden parachute and other sweetheart deals, and place the US Treasury in position to claim all proceeds from any future stock offering when the time comes in the distant future to do so. In exchange, the Government would continue providing financial support as needed provided the company acted responsibly and followed the terms of the arrangement.

Obviously this is different from an involuntary CH11 which would be filed if the business truly collapsed - the chance of that happening is, at this point, completely dependent on the success of vaccines and the avoidance of mutant strains that reduce vaccine effectiveness, essentially placing global society back on track to return to "normal" across all businesses and activities. If we have more "South Africa" type strains that continue to work around the vaccines and require constant boosters and updates, I posit that we as a global society will never return to "normal" per se, but some new form of "normal" that allows business and leisure activities to restart in some different form or frequency from the past, and this "new normal" will require many businesses to rework how they function.

If United is to succeed, it must recognize that every time something looks promising on CNN, it does not mean "everything is coming up roses" and let's fill the planes - the business needs to plan for multiple scenarios, some of them very bad - I just don't have the feeling that UA management is really doing that, but rather there is an apparent almost singular focus that everything is guaranteed to return to normal at "x" date in the future.

DELee

They may or may not always get it right - about anything. And that's what makes this all interesting for discussion.

David

JimInOhio

Your point is off topic in this case. The actual point was the health of the economy and how that potentially impacts the airline industry. With earnings reports coming in well above Street estimates, one can reasonably conclude the economy is better than many were assuming. If companies are financially healthier, their appetite for business travel will be stronger once the pandemic starts unwinding. Additionally, there will be more optimism in the public for spending on personal travel. So, yes, we can compare Microsoft to United.

jsloan

UA had sufficient resources to work their way through most downturns. No major world airline had the resources to support a 70% drop in traffic. Furthermore, the company and the board of directors have a fiduciary responsibility to the shareholders. To say that they "unjustly and negligently rewarded" them is to misunderstand the entire capitalist economic system. That's doubly true if they had any notion they were Too Big To Fail, which is why we need to eliminate that concept from our collective consciousness.

OK, but (a) what's done is done; (b) if more help is needed, the precedent is set; and (c) I'd estimate that there's no more than a 1% chance that anybody in government would go along with that kind of scheme. I'd much rather let the market pick the winners and losers than let the government do it.

And I posit that the chances of a "new normal" are even less than the chance of the federal government nationalizing an airline, which is what you're essentially proposing above. It's a question of worldview, though, and I doubt we're going to be able to come to an agreement on that. It's probably off-topic anyway, except to the extent that it would explain a divergence in our views of UA's financial future.

I haven't gotten that feeling from what I've read, or they would be talking about summer, rather than 2023.

spartacusmcfly

Looks like Thailand is welcoming vaccinated tourists back as of Q3. UA should see a nice bump in traffic on SFO/EWR-HKG and SFO-SIN. I have a feeling Japan will follow this path to allow Olympic visitors (at least those > 16 years old). If China & India also follow, UA's Pacific routes could look very healthy by July, August, and shoulder season!

Also, I feel some are mistakingly assuming UA's passenger traffic and profitability will recover in sync. That's incorrect. I feel recovery will come in three sequential phases:

1. Leisure Travelers - who have shown a willingness to fly, even during dark times (Thanksgiving '20, Xmas '20, etc)
2. Business Travelers - who will always trail for liability reasons
3. UA Financial Profitability

People assume #2 is gating #3. Only partially. One of the core reasons profitability will significantly lag traffic is UA now has material interest-payment obligations stemming from new loans AND material equity dilution stemming from issuing warrants. So when UA says margin/profitability will recover by '23, it's because UA needs time to pay off the debt/interest and to reduce the outstanding equity base. That will certainly take years, but the return of traffic will take mere months in my opinion.

jsloan

OK, well:

(a) You have to consider those interest obligations when discussing the overall thread topic. They can't just say, "well, we'd be profitable if it weren't for our debt payments."
(b) Dilution has zero impact on profitability or margin. The only thing it would impact is EPS. Sure, it would impact the stock price, but if they're saying "we'll get our margins back in 2023," they aren't adjusting them for equity dilution -- I've never heard anyone report margin on a per-share basis. And if you're suggesting that they would be making capital outlays to purchase stock from the open market to give to the government -- I believe the terms of the loans require that UA not do a share buyback. One of the reasons that warrants were required is that they don't appear on the balance sheet -- UA can (and will) issue new stock to cover them.
(c) It doesn't matter how many leisure travelers UA might get for Q3. They cannot make a profit on leisure travelers. In fact, if all they can get are leisure travelers, they'd lose less money by leaving the planes parked and letting someone else capture the traffic.

UA's entire business model is built around getting a mix of fares -- low-margin customers to fill seats, and high-margin customers to generate profit. UA needs both types: with only high-margin customers, they can't fill all of their seats (although they've certainly been trying!). With only low-margin customers, they can't make a profit.

And I'm not talking about "can't make enough of a profit to make the analysts happy." I mean "can't make a profit at all." Pre-pandemic, UA's average profit was approximately $500 per flight: it's common for the entire profit margin for a flight to be made up in one or two passengers on Y/B or J/C fares. Replace those passengers with K fares and you continue to hemorrhage money.

When UA says they expect their margins to return by 2023, that's because they're planning for most of their high-margin traffic to return until mid-2022 at the earliest.

bocastephen

Better curb your enthusiasm! The Olympics are pretty much canceled at this point, we are just waiting for the official announcement from the Japanese Govt - Tokyo will get the next unassigned host slot, but they ain't happenin' this year, sorry.

As the Olympic period represented a huge number of higher cost tickets due to inventory game-playing, plus the tickets for athletes, coaches, officials, broadcasting, etc etc etc - all that revenue is gone, and it was probably a very heft portion of United's summer APAC forecast.

JimInOhio

Are you sure about point (c)? My impression is it's quite rare for UA, or probably any airline, to transport a passenger for a fare below it's variable cost for that passenger. Sure, if a flight is very light that can happen but for the most part UA and others have a decent enough handle on demand to avoid that in most cases. Also, leisure travelers are not a singular category of passenger all paying the same low fare. I'm sure that on most flights, there's a pretty significant spread of airfares for leisure passengers just like there are for business passengers.

HNLbasedFlyer

UA is owned by the shareholders. Now if you want to say the owners of UA rewarded themselves with excess cash (which I don't agree) I at least think the statement has more credibility - UA follows the will of the shareholders/owners, not the other way around.

Regardless, no holding back of cash would have sustained this downturn without government assistance.

spartacusmcfly

Incorrect. Folks often get confused here:

1. Profit is used to describe two things. (1) Accounting Profit (revenue minus cash & non-cash costs such as depreciation), and (2) Cash Profit (cash-in minus cash-out).
2. You're correct UA can't make an Accounting Profit without paying business customers
3. You're incorrect in that UA can absolutely make a Cash Profit flying only leisure customers
4. Cash Profit = Cash in (tickets + cargo), minus, Cash-out (fuel, food, labor, maintenance, slots)

As Kirby stated on the prior earnings call, his focus in 2021 and 2022 is repairing the balance sheet. This means he wants 'cash profit' right now.

It's like telling your kids you'll include the cost of repaving your driveway in their lemonade stand profitability. They'll never turn a profit. But if their cost is limited to water, sugar, and lemons, they're in fat city!

That's the scenario UA is in right now. The planes are sunk cost. They need cash to pay back any loans and interest.

So even if the 2nd half of 2021 was 100% leisure traffic at high-loads, the outcome would be financially beautiful for United!

Actually, that's not true. Between 2014 and 2019, UA spent $9 billion in cash to buy back its own stock on the open market.

The government assistance they received was far less than that. Had they retained that cash, they would have needed no cash from anyone...

HNLbasedFlyer

They lost 7.9 Billion in 2020 - with much much more to come. We don't even have light at the end of the tunnel on losses yet.

spartacusmcfly

Again, confusing accounting earnings with actual cash. United could lose $10 billion dollars by accounting standards next quarter and not lose a cent of cash.

In fact, on the last earning call, UA announced they lost zero cash in the last quarter. Their quarter-on-quarter cash position was unchanged, yet they lost billions by accounting standards.

The fact is, if UA didn't buy back any stock over the past five years, and retained that cash, they would have not needed cash from anyone.