United Airlines will attempt to raise $1 billion though the sale of common stock as it seeks to secure more liquid capital to weather the COVID-19 storm.
On Monday, United announced a first quarter loss of $2.1 billion. That is an astounding number considering that traffic only began dropping significantly in early March. United also used the period to record losses relating to a loan to Avianca, investment in Azul, and declining value of its Chinese routes, but that pales in comparison to the $100 million loss in revenue per day United reported as March waned.
If United lost $2.1 billion last quarter due to one bad month and a few write downs, you can imagine how grim the numbers will be in the second quarter, with passenger demand down 97%.
With revenue all but dried up, United is turning to investors for its next infusion. United will offer 39.25 million shares of common stock plus an extra 3.93 million shares to underwriters (Morgan Stanley and Barclays will have 30 days to exercise that option). Cost will be set at $26.50/share, which is $1.38/share (4.9%) less than yesterday’s close of $27.88 (UAL has lost further ground in after hours trading).
United says the “proceeds from the offering will be used for general corporate purposes.” Over the last three months, United shares have taken a beating, losing 2/3 of their value.
The sale of more shares dilutes the value of existing shares, but is a time-tested method to raise revenue quickly.
> Read More: United Airlines Records Financial Hit On Hong Kong Routes
CONCLUSION
Is United near bottom already when it comes to share price? Hopefully. But I tend to think we will see mounting losses and a further drop in share price before the situation improves.
Will you take advantage of this offer to buy United stock?
A good move by United, but buyer beware. It is a metaphysical certitude that just about every US airline will eventually have to resort to the Bankruptcy Courts. Shareholders get clobbered when that happens, especially subordinate ones. And as an industry, we don’t yet know how long this bottom will play out.
We don’t have any idea what Q2 is going to look like. All we know is it’s going to be bad. There are a lot of companies out there now with historically low share prices, but less future uncertainty. This is a big ol’ pass for me.
Q2? What about Q3 and Q4? I’m seeing predictions that Trump’s “Open America” initiative (blindly telling people to go out, go back to work, go out and mix) is going to trigger a second wave of infections. Then in the fall, some docs seem to be suggesting that there will be a natural wave that comes back, but it will be a combination of the seasonal flu, plus a bigger and more deadly wave of COVID-19. Gonna be a looooong time before people want to get back in planes and fly…
Matthew, have you seen Lucky’s latest post on United? Will you offer your take?
I certainly will.