1 United airlines Holdings inc. nasdaq:UAL Summer 2020 equity review hunter horton university of georgia updated for Q2 2 table of contents company overview concerns Equity overview catalysts competitors financials - 4 Stock performance - 6 important numbers - 7 American - 12 Delta - 11 southwest - 13 conclusion boeing debacle - 20 covid-19 - 15 US government - 18 early vaccine - 23 mergers/acquisition - 24 3 company overview Being the 4th largest airline in the world, United employs just under 88,000 employees and encompasses 765 aircraft. Starting off from Wil- liam Boeing’s beginning, then launching into a postal delivery service, United now flys to over 190 destinations, 111 internationally and 79 do- mestically. United is one of the 3 main airlines in the United States that manages both domestic and international travel, the others being Delta and American. The company is being currently ran by newly appointed CEO Scott Kirby. Kirby has experience in the industry after being president of American Airlines in 2013 after its merger with U.S. Airways. Kirby was appointed in May of 2020, and before that the CEO was Oscar Munoz. Munoz helped turnaround United from the 2010 merger with Continental Airlines along with helping the companies stock increase over 50% during his time with United. United has 6 main hub airports in the United States. Newark, Chicago, Houston, Denver, San Fransisco, and Los Angeles. These hub airports help United reach more destinations and local markets. In 2019, United averaged around 162.4 million paid passengers compared to 158 mil- lion in 2018. United continues to break records and will be an interesting company to pay attention to in 2020-2021. 4 equity overview info as of 08/14/2020 looking over the first half of 2020 Q1 & Q2 5 Financial overview Q1 Top Numbers Looking over the 2020 Q1 report by United released on 4/30, it shows that United is at the forefront of the Covid-19 headwind. Top Details- -Net Loss of $1.7B and adjusted of 639M -Liquidity as of 4/29 was $9.6B and 2B revolving credit -Daily cash-burn averages around $40-45M Compared to Q1 2019 Revenue -19% decrease in passenger revenue -7.7% decrease in cargo revenue -(+)12.5% increase in other revenue -TOR -16.8% Operating Expenses -14.7% decrease in aircraft fuel -(+)3% increase in salaries/other -38% decrease in aircraft rent expenses -TOE -1.6% Q2 Top Numbers Q2 for United Airlines stacked up to be one of the most difficult in the company’s 94 year history. Top Details- -Net Loss of $1.6B and adjusted of $2.6B -Liquidity as of 7/20 was $15.2B (projection of $18B by Q3) -Daily cash-burn apprx. $40M Compared to Q2 2019 -94% decrease in passenger revenue - (+)36% increase in cargo revenue -TOR -87% Operating Expenses -90% decrease in aircraft fuel -29% decrease in salaries -69% decrease in other expenses -TOE -69% 6 Stock Performance UAL YTD - stock performance - -59% SPY YTD - stock performance - +5.76% 7 Important Numbers Q1 Overview Looking over the 2020 Q1 report by United released on 4/30, it shows that United has some tinkering to do with their flights. Top Details- -Domestic Revenue down 17% -International Revenue down 22.4% Revenue Compared to Q1 2019 -In terms of numbers, United has their flights broken into 4 subsections. These numbers are compared to the same time in Q1 2019. -Domestic- (17%) -Atlantic- (17.7%) -Pacific- (36.8%) -Latin America- (12%) Pacific, or Asia, have seen the most drastic drop in passenger revenue. This could be noted since Asia is/was a hotspot in the COVID-19 out- break. Asia showed a drop of close to 37% of revenue, or -$433M same time 2019. Atlantic, or European/African, flights seemed to fare better than the pacific thanks to President Trump’s specific ban of not being able to travel to certain countries, excluding the U.K. and Ireland. Revenue only dropped 17%, or -$258M same time 2019. Since March, United has been able to raise $4B in additional liquidity. Government PPP loans of about $5B to protect operations, salaries and employee benefits. Broken up in 1.5 and 3.5B loans. 8 Important Numbers Q2 Overview Looking over the 2020 Q2 report by United released on 7/20, United’s flights have been cut back drastically. Top Details- -Domestic Revenue down 92% from Q1 ‘19, down 88% from Q1 ‘20 -International Revenue down 96% from Q1 ‘19, down 95% from Q1 ‘20 Revenue Compared to Q1 2020 -In terms of numbers, United has their flights broken into 4 subsections. These numbers are compared to the same time in Q1 2020. -Domestic- (88%) -Atlantic- (95%) -Pacific- (95%) -Latin America- (94%) Q2 2020 showed that United was prepared to begin taking certain finan- cial measures to keep up with Covid losses. As of July 2, United raised $6.8 billion in financings secured against MileagePlus Holdings (United’s Rewards Program) in the form of a $3.8 billion bond and a $3.0 billion term loan, with interest rates of 6.5% and LIBOR plus 5.25%, respectively. United also entered into an equity distribution agreement for the is- suance and sale from time to time of up to 28 million shares of UAL common stock in “at-the-market” offerings. Utilized the at-the-market program to raise $22 million through the sale of approximately 532,000 shares in the second quarter. 9 Important Numbers Let’s Compare Q1 to Q2 UNITED AIRLINES Q1 Numbers Q2 Numbers Q1 2019 Numbers Q2 2019 Numbers Revenue ($M) 7,979 1,475 8.725 11.402 OP Costs ($M) 8,951 3,112 9.094 9.930 NET Inc. (loss)($M) (1,704) (1,627) 292 1,052 ----------------------- ----------------------- ------------------ ------------------ ----------------------- ----------------------- Domestic($M) 4,504 542 5,367 6,547 Atlantic($M) 1,073 57 1,331 1,927 Pacific($M) 688 34 1,21 1,135 Latin America($M) 800 48 906 877 What’s changed from Q1 to Q2? - Larger than expected drop in domestic travel - Limited loss beter than expected by offsetting costs in Q2 - Took financial action to secure financing - Maintained $40-$45M in daily cash burn - Important to pay attention to the cargo unit change - Liquidity has increased drastically - No current cancelations of Boeing or Airbus orders thus far - Partenered with Clorox and Cleveland Clinic, hoping to insure safe travels within these times 10 Competition looking over United’s Competitors Comparing -Revenue -Liquidity -Cargo Revenue? -Gov’t Assistance 11 Delta Airlines Q2 Overview Compared to United Delta, who is 2nd in the north America market by passengers carried in 2019, is also facing Covid-19 headwinds. Top Details ( Q2 Specifically )- -Compared to Q2 2019, showed a 496% decrease in income -International Revenue down 97% vs. 94.6% for United -Domestic Revenue down 93% vs. 88% for United Delta vs. United Q2 ‘19 vs ‘20 Delta Q2 ‘19 vs ‘20 United Revenue ($M) $12,536 -> $1,468 $11.402 -> $1,475 OP Costs ($M) $10,408 -> $6,823 $9.930 -> $3,112 NET Income (loss)($M) $1,443 -> ($5,717) (496%) $1,052 -> ($1,627) (255%) Domestic $8,071 -> $564 (93%) $6,547 -> $542 (91.72%) Atlantic $1,880 -> $64 (97%) $1,927 -> $57 (97%) Pacific $657 -> $32 (95%) $1,135 -> $34 (97%) Latin America $760-> $18 (98%) $877 -> $48 (94.5%) Cargo revenue actually dropped significantly in Q2 for Delta compared to United. Delta had a 42% drop in cargo services, from $186m to $108m vs. United’s 36% increase in cargo, from $295m to $402m. Delta was able to cut around 24% (80,000 workforce) in salaries and related costs, vs. United’s 29% cut (88,000 workforce). Delta also took advantage of the CARES act, being granted close to $5.4 Bil- lion vs. United’s $4.9 Billion. As of July 14, Delta’s liquidity is $15.7 Billion vs. United’s $15.2 Billion Keep in mind United is 3rd in passenger volume (40m behind Del ta) and 2nd in fleet size. 12 American Airlines Q2 Overview Compared to United American, who is 1st in the north America market by passengers carried in 2019, is also facing Covid-19 headwinds. Top Details ( Q2 Specifically )- -Compared to Q2 2019, showed a 412% decrease in income -International Revenue down 97.3% vs. 94.6% for United -Domestic Revenue down 87% vs. 88% for United American vs. United Q2 ‘19 vs ‘20 American Q2 ‘19 vs ‘20 United Revenue ($M) $11,011 -> $1,108 $11.402 -> $1,475 OP Costs ($M) $10,807 -> $4,108 $9.930 -> $3,112 NET Income (loss)($M) $662 -> ($2,067) (412%) $1,052 -> ($1,627) (255%) (not incl. mile revenue) Domestic $8,009 -> $1,027 (87.2%) $6,547 -> $542 (91.72%) Atlantic $1,407 -> $42 (97%) $1,927 -> $57 (97%) Pacific $354 -> $5 (98.7%) $1,135 -> $34 (97%) Latin America $1,241 -> $34 (97.2%) $877 -> $48 (94.5%) Cargo revenue actually dropped significantly in Q2 for American compared to United. American had a 41% drop in cargo services, from $221m to $130m vs. United’s 36% increase in cargo, from $295m to $402m. American was able to cut around 20% (130,000 workforce) in salaries and re- lated costs, vs. United’s 29% cut (88,000 workforce). American also took advantage of the CARES act, being granted close to $5.8 Billion (plus to plan requesting for additional $4.75B) vs. United’s $4.9 Billion. As of July 14, American’s liquidity is $10.2 Billion vs. United’s $15.2 Billion Keep in mind United is 3rd in passenger volume (55m behind American) and 2nd in fleet size. 13 Low-cost Southwest Q2 Overview Compared to United Southwest, who is 3rd in the north America market by passengers car- ried in 2019, is also facing Covid-19 headwinds. Top Details ( Q2 Specifically/to Q2 ‘19 )- -Compared to Q2 2019, showed a load factor* of 31.4% vs. United’s 33.1% consolidated between domestic and international. -TOE down 57% vs. 69% for United -EPS of ($1.63) (219%) vs. ($5.79) (248%) for United Southwest vs. United Q2 ‘19 vs ‘20 Southwest Q2 ‘19 vs ‘20 United Revenue ($M) $5,909 -> $1,008 $11.402 -> $1,475 OP Costs ($M) $4,941 -> $2,135 $9.930 -> $3,112 NET Income (loss)($M) $741 -> ($915) (223%) $1,052 -> ($1,627) (255%) Domestic $5,487 -> $704 (87%) $6,547 -> $542 (91.72%) Atlantic - $1,927 -> $57 (97%) Pacific - $1,135 -> $34 (97%) Latin America - $877 -> $48 (94.5%) Southwest was able to cut around 17% (60,000 workforce) in salaries and related costs, vs. United’s 29% cut (88,000 workforce). Delta also took advantage of the CARES act, being granted close to $2.8 Billion vs. United’s $4.9 Billion. As of July 14, Southwest’s liquidity is $14.5 Billion vs. United’s $15.2 Bil- lion Keep in mind United is 3rd in passenger volume (1m behind Southwest) and 2nd in fleet size. *Load factor represents the proportion of airline output that is actually consumed. Load factor for a single flight can also be calculated by dividing the number of passengers by the number of seats 14 Concerns -Covid-19 -US government -Boeing Debacle 15 Understanding Covid-19 Start COVID-19 has put the United States and the rest of the world in a global pan- demic. This virus is transmitted in ways you expect a virus to spread, through viral and physical transmision between two people. Guidance by both the CDC and WHO (World Health Organization) have told us to do a few key things: -wearing a mask helps the spread -maintaining 6ft or more apart -using alcohol wipes and hand sanitizer as much as possible -avoiding large gatherings of 10-20 or more people -self-quarantining if neccesary to do so Starting January 9th, the WHO noticed a small uptick of covid-19 cases occur- ing in the the Wuhan Province in China. Eleven days later, we began to start seeing the efect on the airline industry. January 20th, showed that three major U.S. airports (Los Angeles, San Fransisco, and New York JFK) were beginning to start screening for COVID-19. Febuary 2nd began the restriction of global air travel restricitons for people coming from provincencs surrounding Wu- han. March 13th, two days after the WHO delcares COVID-19 a global pan- demic, President Trump issues the European travel ban. Below is a chart showing global cases per month compared to air travel flights in the same amount of time. 0 1000000 2000000 3000000 4000000 5000000 6000000 1 2 3 4 5 6 7 8 U.S. Cases vs. U.S. Flights Month American Departure Flights United Staes Cases 16 Understanding Covid-19 United’s Response United has began implementing new ways to make sure customers feel safe flying again. Below are some of their precautions. -temperature checks for employees and flight attendants -sneeze guards and new social distancing markers -masks are required at all times when entering the airport and plane -multiple hand sanitizer stations in United Clubs and gates -new boarding system, back-to-front type loading -reducing inflight beverages and snacks service -only providing pillow and blankets upon request -new UVC wands helping disinfect cabins and cockpits United partnered with Clorox and Cleveland Clinic to help promote a clean- er air transit experience. Using these names, United hopes to retain a greater amount of flyers and mileage plus members. But load factors are still down around 60% industry wide, compared to 2019. Chart below shows load factors average for 2020. 33.10% 34.00% 34% 31.40% 33.80% 0 0 0 0 0 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% United American Delta Southwest JetBlue Load Factor % of Q2 '20 Load Factor(Q2) Airline 17 Understanding Covid-19 United’s Future with COVID-19 We, as a country, are still quite ambigous when it comes to us getting through this pandemic. Sources are saying maybe by October or as late as April 2021, we will have a vaccine fo COVID-19. What does this mean for United? Well, it is to be believed that all of the airlines hit rock bottom of this pandemic in March-April, and the types of changes they have made will more than likely stay in place. Analysts plan on no other drastic changes to occur unless the virus takes a sharp turn. It is important to point out that United is one of the best airlines to come out of this pandemic, compared to the other legacy 2. We see revenue returning to pre-covid levels around 2024-2025. The airline industry was lucky enough to continue to hit new records in 17’,18’,19’ with- out any major obstacle until now. With revenue dropping around 90% yoy, it seems like a tough scenario for any airline to see comparable revenue within the next 3 years. Bussiness passengers will be a great way to tell the stage of reovery for air- lines. Many of United’s largest corporate partners (banks, healthcare, con- sulting) have seen the transition to remote settings. This is a sector of their business that all airlines, not just United, have been relying on for their entire company’s history. This information is not public, but should show in future quarterly reports. The prime target would be for a vaccine to be released before the end of 2020, leading to a possible quicker recovery, especially for people wanting to get back to traveling. Until then, we see United with plenty of liquidity and with shrinking cash burn to withstand the next 4-5 years 18 Government Assistance How the U.S. Government is Assisting America The U.S. government has realized how important it is to keep the U.S. econo- my supported through this pandemic. How? With respect to the airline industry, everyone understands how vital it is to keep the industry afloat. Surrounding the industry involves close to $1 trillion in value and around 10 million total jobs (airlines.org). On March 27th, 2020 President Trump issued into law the CARES Act, a $2 tril- lon economic stimulus relief package. Around $25 billion was set aside for the airline industry to help protect payrolls and daily operations. United ended up getting around $5 billion in direct help from the govern- ment. Around $3.5 billion in direct relief grants, and $1.5 billion in a low inter- est loan. United expects this funding to last through September 30th, and may need a new CARES 2.0 if things don’t begin improving. If no more assistance is provided, United’s stock could be in for some worry, since United may need to furlough workers and pilots. $5,000,000,000 $5,800,000,000.00 $5,400,000,000.00 $3,300,000,000.00 $935,000,000.00 0 0 0 0 0 $0 $1,000,000,000 $2,000,000,000 $3,000,000,000 $4,000,000,000 $5,000,000,000 $6,000,000,000 $7,000,000,000 United American Delta Southwest JetBlue Received Under CARES Act Amount Received Airline 19 Government assistance How Long can United Last? As mentioned before, there may be a need for a CARES Act 2.0 if funding doesn’t continue after September 30th. Come October 1st, United may be forced to retire aircraft earlier than prior estimated, furloughs, and canceling possible routes. It is important to point out the big differences between the big 3 when it comes to selling airline tickets. United and American are selling planes at full capacity if possible, while Delta is still making sure the middle seat is always open no matter what. This could affect the industry when it comes to a possi- ble 2.0 relief. Why? Well this could make it to Washington. If you have two companies hav- ing full capacity on planes and one that is blocking the middle seat, and the coronavirus is still not getting under control, politicians may see that as the airlines not doing enough to help stop the spread. If ceratin madatory mandates are made, that could hurt possible future rev- enues. If anything is given to the airline industry, another $25 billion may not be enough. Certain conservative models were forecasted to show that COVID-19 would be over by the middle of 2021, but if United and others are going to be constantly proped up by the U.S. government, the road to a faster recovery could be delayed. United is poised to outlast this, unless any unforseen events occur, and may need some future assistance if certain restrictions are placed on airlines. The government is there to help in dying times like now, but should not be seen as an endless money tree for companies. If no extra relief is reached by Sep- tember 30th, United may need to take some small temporary measures, but will still be in better shape than American and possibly Delta. 20 Boeing Debacle Does Boeing Screw-ups Affect United? The short answer, no. At least compared to many other airlines in the U.S., United’s Boeing 737 Max footprint is relativley small. Below is a chart of Unit- ed’s current fleet (including orders) for August 2020. If we compare United’s 737 Max size compared to their fleet, to those of American, 3%, and Southwest, 4.6%, United is sitting at around 1.7%. Boeing did alert airlines of possible problems with the planes performance and most of all 737 Max planes have been taken out of service. Thankfully for United, their small 737 Max inventory is small, which has reduced any further financial losses. It is important though to keep an eye on developing stories surrounding this since United has orders for around 171 Max planes still slated. These will not be getting deliverd until Boeing, FAA, and airline pilots come to an agreement announcing the plane is safe to fly again. 0 50 100 150 200 Airbus 319 Airbus 320 Airbus 321XLR Airbus A350 Boeing 737 7,8,9 Boeing 737 Max 9,10 Boeing 757 Boeing 767 Boeing 777 Boeing 787 8,9,10 United's Fleet On Order Currently Own