Few sectors are hurting as badly from the novel coronavirus as the airline industry. Unlike other stocks that also took a hit as a result of the pandemic, airline stocks never had much of a recovery, despite significant government financial support. And Warren Buffet’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) — one of the largest shareholders in airline stocks — dumping its holdings certainly didn’t help. Delta Air Lines (NYSE:DAL) has continued its downward spiral, with a Friday close of $19.19 that represented a new 2020 low for DAL stock.
An Industry Devastated by Coronavirus
When Delta released its results for the March quarter, the effect of the coronavirus pandemic on its operations was in the spotlight. And it was dire. Passenger volume on Delta international flight was down by 90%.
Domestically, it was down 80%. 650 planes were parked indefinitely. Those planes that were still flying required elaborate, time-consuming (and costly) decontamination procedures after every flight.
By the end of March, the company was burning through $100 million per day.
The situation looks just as grim in the short-term. Delta CEO Ed Bastian noted:
“Government travel restrictions and stay-at-home orders have been effective in slowing the spread of the virus, but have also severely impacted near- term demand for air travel, reducing our expected June quarter revenues by 90 percent, compared to a year ago”
Was Government Assistance Enough?
Airline stocks got a boost on hopes of government assistance. However, when the Senate approved a $2 trillion stimulus package on March 26, DAL stock quickly began to slide once again.
Under the terms of the CARES Act, Delta received $3.8 billion in grant money and $1.6 billion in a low interest loan. The money was earmarked for payroll support. In return, the U.S. Treasury received warrants to purchase up to 6.5 million shares of DAL stock at a strike price of $24.39 and a five-year maturity.
In other words, the CARES Act provided money for airlines to stay solvent for the short term, but it came with strings attached, and investors were ultimately unconvinced that would be sufficient for the industry’s long term survival.
After gaining 48% in the days leading up to the CARES Act, DAL gave most of that back in the week following its passage. After its Friday close of $19.19, Delta stock set a new low for 2020, dropping to a level not seen since 2013.
Warren Buffet Bails on Airlines
One headline event definitely didn’t help the plight of airline stocks.
Berkshire Hathaway was a top shareholder among U.S airlines including Delta, American Airlines (NASDAQ:AAL), Southwest Airlines (NYSE:LUV) and United Airlines (NASAQ:UAL).
Warren Buffet recently announced his firm sold all of those airlines holdings at a loss, with a pessimistic view on whether the industry would survive. That news only added to Delta’s downward momentum.
Bottom Line on DAL Stock
There’s no doubt that airlines face tough times ahead, Delta no exception. The question is how tough. Warren Buffet didn’t have the stomach to take on the risk of the situation, but many investment analysts have a more optimistic view.
Among those tracked by CNN Business, DAL remains a consensus “buy” — unchanged since March. And if they’re right, at $19.19 DAL stock has considerable upside. Even the most pessimistic of those analysts has a 12-month price target on DAL of $21, for 9.5% upside. The median target of $34 puts shares at their mid-March price range, but even that depressed level offers 77% upside over Friday’s close.
Whether DAL stock is currently a buy, or something to avoid depends on whether you agree with Warren Buffet’s take on airline stocks, or have confidence that the industry will eventually stage a recovery.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
