United Airlines Raises Equity, We Reduce Our Fair Value
It's difficult to say with any certainty when air traffic will return, but we are confident that demand will eventually bounce back.
We’re lowering our fair value estimate for United Airlines (UAL) by about 9.5% to $38 per share as we account for the equity issuance announced on April 22, 2020, and the firm’s acceptance of government support. United has received $6 billion government loans and has issued the government $0.65 billion in warrants that dilute the firm’s share count by about 7%. Separately, United has raised equity on the open market worth about $1 billion, which diluted previous equity holders by about 15%. We think airlines face a dismal outlook for near-term air traffic and substantial fixed costs, so we are expecting stiff operating losses in 2020. Therefore, we respect that firms may need to employ shareholder-unfriendly tools to maintain solvency while demand is in the doldrums.
Longer-term, while it's difficult to say with any certainty when air traffic will return, we are confident that demand will eventually bounce back. We're modeling demand to begin to normalize in 2021. We think the primary risk to airline investors are increased leverage and equity dilution as airlines look to bolster solvency during this difficult operating environment for the airlines.
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Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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