Delta Air Lines (NYSE:DAL) will release their first-quarter earnings on April 22. Right now, DAL stock shareholders are hoping the news will be “less bad.” But this isn’t the quarter that matters. It’s the forward guidance that will be scrutinized the most.
While the first quarter will be bad, the airline still had two solid months of normal bookings. It was only in March when the bottom fell out. The second quarter is looking awful for the company.
It’s hard to write something that hasn’t already been written about the short-term outlook for DAL stock. Tom Taulli wrote that with no clear indication of how strong demand will return, it’s hard to find a catalyst for the stock. And
Investors Are Being Very Forgiving
Back in the depths of the financial crisis and subsequent great recession, DAL stock dropped to penny stock levels. In a blog post titled, “The Airline Industry’s Rising Crisis,” the Wharton School at the University of Pennsylvania reported the following about consumer demand in 2009:
Similarly, demand by passengers could drop 8% to 2.06 million travelers, in comparison with 2.24 million in 2008. Add to that reductions in profits of 11% for cargo and 7% for passengers. Overall, IATA estimates that revenues will drop by 15%, from US$528 billion in 2008 to US$448 billion in 2009 – numbers that are unprecedented.
Right now, I’m sure Delta would love to see a drop in revenue of “only” 15%. Yet, DAL stock is trading at four times higher than 2009 levels. The fact that Delta is about to receive $5.4 billion from the CARES Act is helping. But the funds that they’ve secured are almost exclusively for payroll relief. And that will only extend through September of this year.
With all that said, investors appear to be giving DAL stock a long leash. But how long will that leash extend?
Airlines Are Fighting an Invisible Enemy
I don’t love the war analogies that are stemming from this pandemic. But there is a lot of misinformation creating a “fog of war” regarding mortality rates and the actual number infected.
Here’s one thing that seems pretty solid. The number of cases of the coronavirus is more than likely significantly higher than what is being reported. At the time of this writing, the United States was reporting 640,000 cases of COVID-19, the disease that is caused by the novel coronavirus.
However, according to a report released in March, scientists believe that for every reported case, there are probably five to 10 additional people who have undetected infections. These cases, which are only about half as infectious as the confirmed cases, account for approximately 80% of new cases.
It’s Impossible to Forecast Demand
This is not a rant about testing or mortality rates. Smarter minds than mine can debate our national preparedness. What this reinforces is that the math has always been fuzzy at best. And here’s why that matters to Delta and other airlines.
Although the unemployment numbers are gruesome to see in print, there are many Americans who are still working, albeit remotely. Their buying power hasn’t changed, plus there will be pent-up demand for travel. But with other options available, how will airlines fit into that?
Since the attacks of 9/11, flying has become inconvenient, but the industry and consumers have largely worked through that. However, the Covid-19 pandemic is now calling into question a flyer’s personal safety.
Without a vaccine, there’s no way to know if the healthy person sitting next to you could also be spreading the novel coronavirus. And that’s a risk many consumers will simply not be willing to take.
What Can Investors Expect From DAL Stock?
Airline stocks will likely lag the broader recovery. The sooner the economy reopens, the brighter the prospects will get for DAL stock. If the airline can get reservations on the books, even if those bookings are for later this year or into 2021, it will give investors a line of sight into the psyche of the American consumer.
But that’s a rough best case scenario, and the reality is a worst case scenario still exists. Namely that the strict mitigation measures throughout the nation extend into the summer or beyond. Either way, there should be no hurry to buy DAL stock.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
