Last week, airline earnings confirmed that the industry was hit harder than expected by fallout from the novel coronavirus. Delta Air Lines (NYSE:DAL) was one such victim on Wednesday. DAL stock made its way 6% lower as investors digested management’s warning that things were only going to get worse.
Aside from cruise lines, the airline industry has one of the bleakest outlooks in the economy. That’s because even as lockdown restrictions ease and the economy gets back on track, air travel will probably be one of the last segments to recover.
Earnings Crushed DAL Stock
All counted, Delta’s first-quarter results were bad, but they weren’t as bad as they could have been. Despite delivering a loss of 51 cents per share, the firm actually beat analysts’ expectations. But no one is tuning in to earnings this season to hear about first-quarter performance — we all know it was pitiful. Instead, investors want to know where airlines see this going.
Delta’s response was a terrifying one. Management essentially admitted it doesn’t quite know what the future holds, but what it can see doesn’t look pretty. CEO Ed Bastian admitted that he’s not optimistic about a quick recovery even after lockdown restrictions have been eased. The company is expecting the slowdown in air travel to persist for three years.
Post-Coronavirus Air Travel Looks Bleak
Bastian has also noted that airlines may have to embrace permanent changes to accommodate new social distancing post-pandemic. One such change could be new seating plans that allow more space per passenger, thus reducing load factors.
That’s a key metric for airlines’ profitability and could throw a wrench in airlines’ ability to recover swiftly once travel resumes.
Michael O’Leary, CEO of European low-cost airline Ryanair (NASDAQ:RYAAY), has said that reducing load factors would crush his business. When asked if he would be willing to block out the middle seat in order to give passengers more space, he flatly refused.
“We can’t make money on 66 percent load factors. Even if you do that, the middle seat doesn’t deliver any social distancing, so it’s kind of an idiotic idea that doesn’t achieve anything anyway,” O’Leary stated.
Business Travel a Beacon of Hope for Delta
But Delta has said it will work to create a safer experience through social distancing if that’s what’s recommended. That’s likely because DAL doesn’t rely solely on a heavy volume of passenger to drive revenue — business travel is also a significant profit driver.
Even business travel, though, could be forever changed. Bastian admitted that himself, saying many companies have gotten more comfortable with a telecommuting culture in the wake of the coronavirus. Still, he’s hopeful business travelers will eventually return, saying, “don’t think that we’re turning into a telecommuting workforce…Business travel is going to come back. People need to be face-to-face doing business together when it’s safe, when that opportunity arises.”
Delta Is Shrinking
In any case, Delta, alongside many of its peers, is trimming down its business to cope with reduced demand. For its part, Delta says it plans to reduce spending by 50% by the end of the second quarter, a move that will no doubt include a large swath of layoffs.
In a letter to his staff, Bastian confirmed that the airline was on course to shrink, saying, “We don’t know when it will happen, but we do know that Delta will be a smaller airline for some time, and we should be prepared for a choppy, sluggish recovery even after the virus is contained.”
The Bottom Line on Delta Stock
There’s no question that the airline industry will recover eventually, and DAL stock will rise right alongside it. But that recovery is likely years away.
Government regulations regarding flying and social distance could be a gamechanger that gives Delta and other airlines that cater to business travelers a leg up. But even if that is the case, the recovery for DAL stock is going to be slow and choppy at best — Bastian said it himself.
Until a coronavirus vaccine or reliable medical intervention has been found, airline travel will continue to suffer. Instead, investors should find other industries like tech, healthcare, and consumer staples that will recover sooner. Delta isn’t a buy until we can see through the clouds what the future holds.
Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.
