The airline group has been a disaster so far this year, which should come as little surprise to investors at this point. Delta Air Lines (NYSE:DAL), which reported quarterly earnings today, hasn’t been immune to the decline. Let’s put it this way: DAL stock is still more than 60% off its 2020 high and that’s better than most of its peers.
I think that paints a pretty good picture for how this year has treated the industry. It doesn’t help when there is uncertainty surrounding government aid and public frustration at this group’s decision to spend billions of dollars on buybacks over the years.
It also doesn’t help that reports have surfaced of Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) paring down exposure to DAL stock and Southwest Airlines (NYSE:LUV).
That’s the opposite of what investors assumed, with many believing the Oracle would be adding more to this beaten down group and potentially eyeing Boeing (NYSE:BA) as a candidate as well.
With airline stocks down big, investors are still trying to find their bearings. They are mainly debating just one question: should they avoid them like the plague or dive in? As we get more information, we get more clarity. Thankfully, quarterly earnings shed plenty of the former.
Delta Air Lines reported a non-GAAP loss of 51 cents per share, which was 31 cents better than expectations. However, a GAAP loss of 84 cents per share missed estimates by 16 cents. Revenue of $8.59 billion declined 18% year-over-year and missed analysts’ expectations by almost $750 million.
Those numbers concern me for one simple reason: the ongoing pandemic didn’t affect a full quarter of business. On March 1st, the U.S. had less than 100 cases of novel coronavirus. January was business as usual and February shouldn’t have been too disruptive, although by then the American public was taking notice and some international flights were coming offline.
Still, Delta realized a pre-tax loss of more than $420 million on what was less than one quarter of carnage. I’m also worried about cash burn. This portion of the company press release helps put that cash burn in perspective (emphasis mine):
“With the significant impact of COVID-19 on Delta’s revenue, we were burning $100 million per day at the end of March. Through our decisive actions, we expect that cash burn to moderate to approximately $50 million per day by the end of the June quarter.”
Burning $50 million a day is worrisome — and that’s management’s target rate for cash burn! While the company ended the quarter with $6 billion in liquidity, that will only last so long with this type of burn. That said, DAL has received $2.7 billion of an expected $5.4 billion in federal aid, which should help matters.
Trading DAL Stock
The company also said it could apply for $4.6 billion in secured loans, if need be. That provides some additional security and reassurance around the airline’s liquidity situation. But anytime liquidity is in question, it raises some degree of concern.
So far, the market is unsure how to feel about the quarter. There are some nods of reassurance, but with so many unknowns related to the coronavirus, it’s hard to know when life will go back to normal and when it does, what that will look like for airlines.
DAL stock popped in pre-market trading and so far, it’s down slightly on Wednesday, off 1.4%. Will Delta retest the lows? To be frank, the charts do not look all that inspiring. The stock’s inability to rally on earnings creates a concern that the prior trends will remain intact. That’s a problem for the bulls because the prior trend were bearish.
DAL stock remains below the 20-day moving average, as well as downtrend resistance (blue line). A close over these marks (currently near $25) would negate them and put $30 in play. However, as long as Delta is below these marks, it puts more downside on the table.
However, a close below the $21 to $22 area is a major warning sign for investors. That puts the $19.10 March low in play, with an even deeper decline in the cards should DAL close below that mark. Here’s the bottom line: keep an eye on $21 to $22.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.