Delta Air Lines (NYSE:DAL) was one of the first of the legacy airlines to report first-quarter earnings, and the results for DAL stock were pretty much what we expected.
But as Delta is now trading at a 60% discount from where it was before the novel coronavirus, and retrenching for a long, slow recovery, I’m convinced there’s a great opportunity here for investors with a long-term time horizon.
All you have to do is be patient, and DAL will reward you in the coming quarters.
Just a month ago, I was very uncertain about Delta. I’ve always liked legacy airliners and the profits that they bring to investors, but I was worried that DAL and other airlines taking CARES Act assistance would be prevented from offering dividends in the short term. I even went as far as to call Delta a gamble without its dividend.
So I’ve taken a closer look at this Atlanta-based airliner. I reviewed the first-quarter earnings reports, and I’ve poured over the transcript from Delta’s post-earnings call with analysts.
And now I’m convinced that DAL is on the right track, and that my own investment in Delta will pay handsomely.
DAL Stock: Earnings at a Glance
First, the earnings report. Delta reported at $534 million loss for the first quarter – its first quarterly loss in five years. The loss excluding special items was $326 million, versus a profit of $639 million in the same quarter a year ago.
Revenue fell 18% to $1.9 billion, and the miles flown by paying passengers dropped by 17%.
Keep in mind, however, that the coronavirus largely only affected international flights for the first two months of the quarter. It wasn’t until March when domestic flights really took a hit, as social distancing and stay-at-home orders became the norm for much of the U.S.
Happily, Delta is now in a position to restart some of its more lucrative and important international flights.
But even when that revenue, the second quarter for DAL stock will likely be much worse than the first. Delta reiterated its previous warnings that Q2 revenue will be down roughly 90%.
Delta is taking positive steps to cut expenses for the quarter, including parking more than 650 aircraft, consolidating concourses, chopping advertising campaigns and closing Sky Clubs. Those steps alone will save about $550 million for the quarter, says Delta CFO Paul Jacobson.
But it’s only the beginning of several steps being made to make Delta a better airline for investors.
Delta Prepares for the Future
While it’s easy to look for the doom and gloom in Delta’s earnings report, there’s really nothing there that was a surprise. The most important thing is what Delta is doing to ready itself for the rest of 2020 and the inevitable recovery to follow.
Through the federal CARES Act relief package approved by Congress, Delta secured $5.4 billion in relief funding, including a $1.6 billion low-interest, 10-year loan.
Delta agreed not to cut pay or benefits or institute involuntary furloughs through Sept. 30. The airline also agreed to allow the federal government to purchase 1% of DAL stock over five years, at $24.39 per share.
But that’s not all. Delta also launched a round of financing to get $1.5 billion from institutional investors over three years. DAL’s financing package was rated Baa2 by Moody’s and BBB- by S&P Global Ratings and Fitch.
And finally, Delta is taking aggressive steps to remake its fleet, hustling some older jets out of service. It is retiring its MD-88 jets in July, rather than keeping them in service through the end of the year as originally planned. And Delta’s MD-90 jets, as well as older 757 and 767 jets, will also likely see a similar fate.
“Anything that was scheduled to retire over the next five years has an accelerated path toward retirement,” CEO Ed Bastian says.
Delta has 184 aircraft on order from Airbus (OTCMKTS:EADSY), but is in discussions on deferring payments or delivery, saying that Delta has no plans to spend money on aircraft in 2020.
In all, the recovery will be long, but Delta has a firm plan, Bastian says:
“These are truly unprecedented times and the path to recovery is uncertainty and will likely be choppy. And while we all wish we could predict the pace of the recovery, the truth is, our recovery will be dictated by our customers feeling safe, both physically and financially to begin to travel at scale. Given the combined effects of the pandemic and associated financial impact on the global economy, we believe that it could be up to three years before we see a sustainable recovery. And to succeed throughout that environment, we will likely need to resize our business in the near term to protect it in the long term. And while the resizing of our business over the short term is painful, it will also be an opportunity to accelerate strategies to streamline our company, simplify our fleet and reduce our fixed cost base in ways not possible in the past.”
The Bottom Line on Delta Stock
DAL stock is currently trading near $22, after being at $62 just before the coronavirus pandemic. And while it’s folly to think that the company will resume its high-earning ways this year, Delta has the money it needs to survive the pandemic and a solid plan to emerge as a better company.
Analysts currently have DAL stock with an average price target of $37.85, which would be a 72% return. Even if it takes two or three years to get there, I’ll take a 72% return over three years any time.
If you are looking for a short-term gain, airline stocks aren’t for you right now. But for long-term investors, DAL stock is a great opportunity.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he was long DAL stock.