United has booked $8.2 billion in net operating losses through the first nine months of 2020.
Daniel Slim/AFP via Getty ImagesAirlines are racking up such heavy losses that even when they start turning a profit, they aren’t likely to pay taxes for years.
United Airlines Holdings (ticker: UAL) said in a filing this week that it had booked $8.2 billion in net operating losses, or NOLs, through the first nine months of 2020. The company now aims to protect those losses as tax assets with a “tax benefits preservation plan.”
The losses could be at risk if an activist investor were to acquire more than 5% of the outstanding stock, triggering ownership-change provisions that could essentially wipe out the tax benefits. The plan essentially adopts a “poison pill” formula to dilute the shares outstanding, preventing that from happening.
United’s NOLs would become more valuable if corporate tax rates increase in a Biden administration. President-elect Joe Biden’s plan calls for the corporate tax rate to rise to 28% from 21%. At that rate, United could shield $2.3 billion in pretax profits per year. That would be worth 16% of United’s outstanding market value of $14.3 billion.
United won’t come close to earning $2 billion in 2021. Analysts expect the company to report a $1.5 billion pretax loss next year and $1.6 billion in pretax profits in 2022.
Still, the NOLs will become far more valuable in a recovery that sees air traffic and revenue rebound sharply. And the NOLs could shield taxable income for years, ultimately accruing to equity owners if the company uses the cash to pay down debt.
United isn’t the only airline racking up tax losses that could shield income. American Airlines Group (AAL) reported $9.1 billion of federal NOLs and $3 billion of state NOLs at the end of 2019. The airline said in a filing that “substantially all” of it would be available to reduce taxable income. And American’s NOLs are likely to rise. The company is expected to report $12.3 billion in pretax losses this year as its revenue plummets more than 60%.
Delta Air Lines (DAL) is also likely to shield profits for years. The company had $1.9 billion of NOLs at the end of 2019. Those tax losses won’t begin to expire until 2027. The company is expected to report an $8.7 billion pretax loss this year. And analysts expect Delta to report $4 billion in pretax profits in 2021 and 2022, giving the company a long runway to use its NOLs.
United’s plan has a side effect, too—deterring an activist investor. Under the plan’s change-of-ownership provisions, common shareholders may be granted rights to purchase their equivalent amount of shares at a 50% discount to the market price—effectively diluting the shares outstanding by 50%.
Some large investors, including Warren Buffett’s Berkshire Hathaway (BRKA), have owned roughly 10% stakes in airlines. United’s plan doesn’t appear intended to deter purchases by friendly, long-term investors.
One of the largest actively managed fund groups now owning shares of United is Primecap Management, which holds nearly 10% of the outstanding stock, or 29 million shares. Other large equity owners include Par Capital Management, a private investment firm with a 2.6% stake, and Altimeter Capital Management, a hedge fund with a 1.6% stake.
With the shares deeply depressed and United’s market value just $14.3 billion, however, the stock could be attractive to an activist hedge fund or private-equity firm that could use its equity stake to pressure management or mount a proxy campaign.
“There’s no question that United’s plan functions as a poison pill,” said one Wall Street analyst. “Given the volatility in the stock and the low market cap, they want a plan like this as protection.”
A spokesman for United declined to comment. United’s plan is up for a shareholder vote at its 2021 annual meeting.
United stock was down 0.5%, at $48.81, in recent trading. The S&P 500 was down 0.2%.
Write to Daren Fonda at daren.fonda@barrons.com
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United and Other Airlines Have Racked Up Heavy Losses. That Could Help Them in a Recovery. - Barron's
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