United Airlines liquidity runway stretches at least 18 months, as cash burn rate contracts

United Airlines posted an expected decline in revenue for 2Q20 yesterday (21 July), but managed to match capacity to demand and rein in cash burn at the lower end of guidance, according to three sources following the company. If the airline continues its conservative approach, keeping cash burn as low as possible, it may not need to raise additional liquidity in the capital markets for the next 18 months, two of the sources added. 

Still, the company would have access to a potential draw of a federal secured CARES Act loan, they noted. 

Management said on this morning’s earnings call that United is leaving the option open to draw on the CARES Act loan. The company added that if it were to draw on the loan, it would be secured by slots, gates and routes, similar to peers such as Delta Air Lines. The potential collateral package is valued at USD 9bn, according to United officials. 

Management said the company doesn’t currently have any other first lien capacity left. 

Since the beginning of the pandemic, the company has raised USD 16.1bn through debt offerings, stock issuances and a CARES Act Payroll Support Program grant and loan. Most recently, the company raised USD 6.8bn in financing in the form of a USD 3.8bn bond and a USD 3bn term loan. 

As of 20 July, the company had USD 15.2bn of liquidity. United expects USD 18bn in liquidity at the end of the third quarter. 

“This has been the worst period in aviation history, but they’re holding in, as shown by their liquidity and the fact that cash burn is going down,” one of the sources said.  

For the quarter, United posted USD 1.475bn in total operating revenue, down 87.1% year-over-year. For the same period, capacity was down 87.8% year-over-year.

In 2Q20, the company burned USD 40m of cash per day on average, the tight end of 2Q20 guidance of USD 40m-USD 45m. Assuming passenger revenue will be down 83%, the company expects USD 25m of cash burn per day in 3Q20.

United also revised full-year guidance for capex down to USD 3.7bn from the previously announced USD 4.5bn.

Management expects demand as measured by revenue to recover to 50% and then plateau at that level until a vaccine is widely distributed. When passenger revenue and capacity recover to 50%, the company expects cash burn to break even. 

Moving forward, after cash burn is neutralized, the company will focus on restoring the balance sheet before focusing on growth prospects, but will take some aircraft deliveries. As of now, the company has entered into an agreement with Boeing to not accept any new aircraft in 2022. 

United’s USD 400m 4.25% senior unsecured notes due 2022 traded at 88.5 for a 10.248% yield compared to 86.062 for a 11.584% yield on 15 July, according to MarketAxess.

Its USD 350m 4.875% senior unsecured notes due 2025 nudged up to 81.75 to yield 10.034% after market close yesterday (21 July) from trades at 80.5 to yield 10.436% earlier in the day.

The equity closed today at USD 31.67 per share and a market cap of USD 9.20bn, down 4.23% from yesterday’s close. 

2020 Debtwire

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