It’s not time to rush back into airline stocks just yet. And that includes Delta Air Lines (NYSE:DAL) stock.
While most have become decimated “blood in the street” opportunities, we first need to see a successful reopening of the U.S. economy, and signs of life in the travel industry.
Until that happens, there’s no reason to venture in.
Not even a $50 bailout was enough to keep investors interested, including billionaire Warren Buffett, who just sold all of his airline holdings. In fact, at the latest Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) meeting, he noted the firm sold all of its airline stocks including Delta, American Airlines (NASDAQ:AAL), United Airlines (NASDAQ:UAL), and Southwest Airlines (NYSE:LUV).
However, once the smoke clears, I strongly believe DAL is the stock to own. Not only is it one of the most profitable airlines in the world, it’s an industry leader. While it’s not time to jump back into the DAL stock just yet, I believe the stock could fly back to $58 a share with a good deal of patience, and a return to normalcy.
Delta is Prepared for the Future
Like most airlines, Delta isn’t out of harm’s way just yet.
The airline lost $534 million in the first three months of 2020 – its first quarterly loss in more than five years. Excluding special items, the loss $326 million, as compared to a year-earlier profit of $639 million. Revenue fell $1.9 billion.
That’s not really a big surprise, though. Plus, the company is preparing for the rest of the year. For one, through the federal CARES Act, it secured $5.4 billion in relief funding. That consists of payroll support of $5.4 billion, including a $1.6 billion low-interest, unsecured 10-year loan.
Delta already has nearly $3 billion of that in hand and expects to get the rest by August.
In addition, according to company CFO Paul Jacobson, “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.”
Warren Buffett May Have Sold Airlines Too Early
While I’m not going to question Warren Buffett’s decision to sell DAL stock and his other airlines, I think he sold far too early. In fact, selling airlines may go against his very investment mantra.
Remember, this is the billionaire that made fortunes from telling us a “climate of fear is your friend when investing; a euphoric world is your enemy.” And of course, we all remember his advice to “be fearful when others are greedy and greedy when others are fearful.”
With all due respect, by selling airlines, Buffett sold out of fear. Here’s his reasoning:
“I was wrong about that business because of something that was not in any way the fault of four excellent CEOs … 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 perhaps average of at least $10 or $12 billion each.”
Remember, as we also learned over the years, Baron Rothschild would tell investors, “The time to buy is when there’s blood in the streets, even if the blood is your own.”
Even Sir John Templeton would tell investors to buy excessive pessimism, which we see now.
There Are Signs of Recovery for Airlines
“There are ‘flickers of hope’ that demand has bottomed, according to Raymond James analyst Savanthi Syth. Data from the Transportation Security Administration indicated a slight uptick in travelers passing through checkpoints on May 1, going to a 93% year-over-year decline from a low 96% in mid-April,” as reported by Barron’s contributor Daren Fonda.
Even Southwest CEO Gary Kelly recently told “Face the Nation” that it’s safe to fly again. “I don’t think the risk on an airplane is any greater risk than anywhere else,” adding, “I think we’ve seen the bottom here in April. Each week after the first week of April has gotten successively better. I think May will be better than April was. I don’t think June will be a good month, but hopefully it will be a bit better than May.”
The Transportation Security Administration screened 154,695 people as of last week, despite travel restrictions, says Fox Business contributor Audrey Conklin. That’s up from 87,534 screened on April 14. While that’s wildly lower historically, we’re seeing progress.
That doesn’t mean investors should run out and buy airline stocks again just yet. However, once we begin to see further signs of recovery, I’m a buyer on the excessive fear. Perhaps Warren Buffett will invest in them again soon, too.
Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, he did not hold a position in any of the aforementioned securities.
