United Airlines wants to get up close and personal with your wallet. On Tuesday, the Chicago based airline began offering 39,250,000 shares of its common stock. The underwriters, Morgan Stanley and Barclays are selling the stock in the USD$25.95-$26.50 range. The move could potentially raise more than USD$1 billion for the airline.
United Airlines looks to multiple sources for funding
Like airlines everywhere, United Airlines has been hit hard this year by evaporating travel demand. Two days ago, it posted a preliminary USD$2.1 billion loss over the first quarter of 2020. United Airlines has cut around 80% of its capacity across April and expects to increase this to 90% in May.
The decision by United Airlines to raise more funds by issuing shares follows the airline confirming that it will receive USD$5 billion under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This money, of which USD$3.5 billion will be a direct grant and USD$1.5 billion will be a low-interest rate loan, will be used for payroll expenses.
It also comes just days after the airline announced a sale and leaseback deal with Bank of China Aviation. That deal involves six Boeing 787-9s and 16 Boeing 737-9s.
The funds raised via the stock offering will be used for general corporate expenses. United’s general corporate expenses are those expenses incurred as part of its daily operations. They do not include selling and administration expenses.
The announcement of the stock issue on Tuesday sent United’s stock price down 3%. The stock price has already dropped 67% over the last three months. United’s stock price closed at USD$27.88 on 21 April. It is a long way from a 12 month high of USD$96.03.
US taxpayers could end up being significant stockholders in United Airlines
Besides yesterday’s new stock offering and the payroll assistance funding, United Airlines also plans to access a further USD$4.5 billion via alternative government packages pitched at airlines. This later arrangement requires United to issue shares based on the amount borrowed.
According to MarketWatch, United will give the US Treasury warrants to buy up to 4.6 million shares of its common stock at a strike price of USD$31.50 per share, a good premium on the current price.
MarketWatch notes that United Airlines can issue warrants for up to 14.2 million shares. The upshot of this is that US taxpayers could end up being the fourth largest stockholders in United Airlines, owning 18.8 million shares. That’s about a 7.6% stake.
It isn’t just United Airlines doing this. Multiple US carriers, including Delta and American Airlines are taking advantage of the offer.
Should governments be propping up and buying stakes in airlines?
It raises a couple of interesting questions; should governments be propping up airlines, and should governments end up being significant stockholders in airlines?
The answer to those questions will largely depend on your philosophical point of view and whether an airline’s stocks are doing well. No-one complains when they own shares that are performing well.
But the stock prices of US carriers are being hammered. There’s no end in sight regarding the collapse in travel demand. As the United States moves to close its borders to all foreigners, things will only get worse for the US carriers.
It begs the question, unless you are taking a reasonably long term view, whether now is a good time to be buying airline stocks.
United Airlines wants you to think so. It is having a crack at the wallet of US taxpayers via issuing warrants. Yesterday’s public offering suggests the airline isn’t finished asking for money yet. Whether punters answer calls from their brokers flogging the stocks is another question.