United Airlines issues guidance, recovers 7% early decline

Shares of United Airlines Holdings Inc (NASDAQ: UAL) recovered from a 7 percent pre-market decline as investors appear to have gotten more comfortable with the airliner’s outlook.

Liquidity update

United guided in a Monday morning press release its liquidity to be around $17 billion at the end of the third quarter of 2020. The company will obtain a $5 billion loan that will be backed by its loyalty program called MileagePlus. The company will also receive $4.5 billion through the Coronavirus Aid, Relief, and Economic Security Act (CARES) Loan Program.

United said the new $9.5 billion on top of another $7.5 billion in liquidity will provide “even more flexibility” as it navigates through “the most disruptive financial crisis in the history of aviation.”

Looking forward, the company expects to burn around $40 million per day in the second quarter and it will ease to $30 million per day by the third quarter.

Making sense of the update

At first glance, the press release seems confusing as some are questioning how an airliner can place a loyalty program as a form of collateral. The MileagePlus program itself generated more than $5 billion in revenue last year and contributed around $1.8 billion in EBITDA. The company itself estimates the loyalty program to be worth around $20 billion.

There are more than 100 million members of the program who collect loyalty points. It generates cash flow from the sale of these points to United and other third-party partners or from revenue sharing agreements as part of a co-branded credit card. 

Typically, a loyalty program is by far an airliner’s most valuable asset, especially when one enters into bankruptcy.

What’s next for the airline industry?

United said in its release it continues to see a “steady improvement” in demand for domestic travel and for certain international destinations. It has seen a reduction of more than 70% in customer cancellations rates since peaking in April. In fact, June ticket revenue is on track to be up by nearly 400% from April.

However, management still expects available seat miles to be down 85% in June year-over-year and down 75% year-over-year in July. Ticketed passenger revenue is guided to be down around 90% in June and down 82% to 88% in July.

Cargo revenue continues to be strong and is likely to be up more than 30% in the second quarter on a year-over-year basis. But including the strength in cargo, total revenue is guided to be down 88% in the second quarter.

Beyond a two-month period, United expects to see depressed demand through October