The rally since March has been short-lived for Delta Air Lines (NYSE:DAL). Simply put, there just hasn’t been much good news for investors holding DAL stock.
Consider that the shares are now trading at levels not seen since 2013. The market cap is at about $14 billion.
Now, this is not to imply that the situation is completely hopeless. After all, Delta was able to raise financing in the debt markets. Last month the company issued $3.5 billion in bonds, which also included a term loan for $1.5 billion. The interest was robust as investors submitted about $10 billion in offers.
But even this financing is a bit concerning for DAL stock. Not only is the balance sheet getting more lopsided in terms of liabilities but the company had to pledge assets for the debts, such as for slots, gates and routes at JFK airport, LaGuardia, Reagan National and Heathrow.
The New Normal and DAL Stock
Delta is certainly a well-run operation and has a strong history of profitable growth. The company also has the benefit of scale, with a system of more than 300 destinations across over 50 countries.
But the big question is: How will the novel coronavirus impact the long-term for air travel? Will there be a new normal where there is less activity?
It’s certainly tough to answer this, but then again, as for business travel, there will likely be more emphasis on virtual conferences and sales calls via Microsoft (NASDAQ:MSFT) Teams or Zoom’s (NASDAQ:ZM) video conferencing platform. Companies will see this as a cost-effective alternative. As for tourism, there will probably be many people who will not feel comfortable flying on a crowded plane – at least, until there is a vaccine.
Thus, it seems reasonable that recovery will take considerable time and that Delta may ultimately be a much smaller operation.
Limited Bailout Help for DAL Stock
It’s true the federal government will not let a major airline fail. The industry is too strategic for the U.S.
Regarding the bailout (which was part of the CARES Act) Delta received $5.4 billion. A majority of it was for payroll, but of course, there are strings attached. Delta cannot layoff or furlough any employees until October. And it looks like this cannot include reducing hours for employees either.
Something else that is a bearish factor for DAL stock: The bailout loans are not covering all the costs either. According to a report in the Wall Street Journal, they offset about three-quarters of the burn.
In the meantime, there will probably be more regulations imposed on the airlines, such as with new safety requirements like having middle seats remain vacant. No doubt, this will weigh even more on the revenue generation.
Bottom Line on Delta Stock
With substantial fixed costs, Delta is likely to hemorrhage cash for quite some time. The CFO Paul Jacobson noted that the company was burning through $100 million per day during the second half of March. However, by the end of June, it should be cut in half.
But this means that the runway for Delta is not necessarily long. Based on the number-crunching from Raymond James analyst Savanthi Syth, the company has about ten to eleven months’ worth of cash in the bank.
Yet I think the most ominous sign for DAL stock is from Berkshire Hathaway’s (NYSE:BRK.A,NYSE:BRK.B) Warren Buffett. He unloaded his entire holding of the company, along with American Airlines (NASDAQ:AAL), United Airlines (NASDAQ:UAL), and Southwest Airlines (NYSE:LUV).
Buffett said: “The airline business, and I may be wrong and I hope I’m wrong; I think it changed in a very major way and it’s obviously changed in the fact that their four companies are each going to borrow an average of at least $10 or $12 billion each.”
Granted, Buffett is not perfect. No one is when it comes to investing. However, Buffett has a pretty good sense of gauging major trends in industries. And as for airlines, he does have a valid case that there is a fundamental change – and not for the better.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
