A lot has changed in the last two months for airline stocks. Delta Air Lines (NYSE:DAL) has fallen almost 70% from its January highs. Up until then, it was outperforming its peers United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL). Now, DAL stock is just as stuck. It clearly faces tremendous headwinds as the world tries to overcome the novel coronavirus.
Sentiment was already bad in February, but it’s sinking even lower now. Since the world is still under quarantine, the demand for air travel is a tiny sliver of what it once was. Hardly anyone is flying. Because of this, many on Wall Street are worried that airlines won’t survive the crisis.
To make matters worse, we learned this week that Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) Warren Buffett sold some of his Southwest Airlines (NYSE:LUV) and DAL stock. The markets shrugged off the news because Berkshire still holds over 50 million shares of each.
Therein lies the opportunity for investors. The fear in airline stocks may have already reached a peak, so even if the fundamentals deteriorate, investors have already priced the risks in.
Time Will Save DAL Stock
Airlines have no income right now, so value will be a tough sell as price-earnings ratios become irrelevant. But the thesis here is simple, and it revolves around the upcoming election. There is no way that incumbent President Donald Trump will let U.S. airlines fall this year.
And Democrats will not impede his efforts, because no candidate wants to be the one to kill a U.S. airline. I think the world learned its lesson after the Lehman Brothers. Too big to fail is a real concept.
Here, DAL stock is tussling with levels from its very first quarter as a public company. After the 2007 crash, it took its time building a strong base for a rally in 2013. But the recent crash brought the stock price to that exact neckline (see chart).
Since then, the stock bounced 40% off the neckline. But there is so much uncertainty that we will see the price see-saw wildly in this massive range.
What should investors do with DAL stock? They should either actively trade around short-term levels or bet on the longer-term recovery of the sector. The world stopped flying on demand and it will restart the same way. In the next 60 days people will need to fly again.
Air travel is not optional, it is a necessity to keep the globe running. This downturn is also different than the prior crash. The recovery will be an instant “on” with $2 trillion worth of incentives, and maybe more, to help with the ramp back up. the upside potential here is big enough that DAL stock is a decent speculative trade.
Why is it speculative? There is always the chance that politicians make a mistake, and that could prove costly for the airlines here.
The Potential Upside Surprise
Investors also must not forget the wrinkle that the grounding of Boeing’s (NYSE:BA) 737 Max is adding to the airline business. But at this point, I believe the 737 Max is likely to be a potential source of upside surprise.
As the pandemic eases, regulatory agencies will be under pressure to expedite the release of that plane. This is not to say that they will rush, but rather they will do all they can to accomplish the necessary steps at the fastest rate possible. Boeing needs help, and the White House vowed to provide it. The easiest way Trump’s administration can assist is by letting it deliver its inventory of planes. Related headlines will surely help DAL stock and its peers.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
