Recent days have seen market volatility increase, especially as worries over a potential second wave of the novel coronavirus hit news headlines. As a result, airlines and travel shares, such as Atlanta-based Delta Air Lines (NYSE:DAL) stock, have come under pressure.
On June 5, DAL stock saw a recent high of $37.24. Now it is hovering at $29. The shares are down around 50% on a year-to-date basis.
Airlines are a capital-intensive business, requiring large amounts of money to operate safely and effectively. According to the International Monetary Fund, the global economy will contract 3% in 2020. Yet, in 2021, the IMF forecasts robust growth.
However, a second wave of the pandemic could easily mean that those projections do not hold. If you are not yet a shareholder in Delta, you may want to wait several weeks before committing new capital into DAL stock.
Here’s why.
Airlines Economics in the Current Environment
The Covid-19 pandemic has caused havoc in several industries with one of the worst affected has been the global aviation industry. Airline operations worldwide have been crippled by the spread of the coronavirus.
Joseph Sobieralski, an economics professor at Purdue University, sums it up:
“The airline industry has faced many threats throughout history, but none quite as rapid and severe as the one posed by the spread of COVID-19. One constant during uncertainty shocks and industry downturns is that airline labor bears the brunt of the decline.”
Several crucial drivers affect the industry as well as airline management, and for investors, the share price of airlines like DAL stock. These factors include:
- Societal developments, such as urbanization and demographic changes.
- Economy, such as the price of oil, business cycles, and volatility.
- Technology, such as aircraft development, cybersecurity, or the role of social media in customer engagement.
- Environment, such as regulation of emissions and noise pollution.
- Politics, such as regulatory changes, trade protection, and response to terrorist threats.
- And as 2020 has shown, pandemics, such as Covid-19 may mean domestic and/or international travel bans.
Within this context, airlines are under constant pressure to improve performance, ensure passenger safety, increase efficiency, become technologically advanced, and at the same time, excel in customer satisfaction. And it’d be fair to say that this year, the airline industry has been upended.
Delta Expects Q2 Revenues to Fall 90%
Since late May, global economies have started opening up. Yet international travel, as well as domestic travel in the U.S., remains quite restricted. And most industry executives expect demand to stay depressed in the foreseeable future.
Delta released poor first-quarter results back in late April. Revenue fell 18% to $9.59 billion, and below analysts’ estimates of $9.64 billion. Management also lowered its expected Q2 revenues by 90%. It also said it will need to “resize” its business in the near term.
Yet we do not fully know what Delta or other airlines may do specifically to bring back customers.
According to recent research by Veronique de Rugy and Gary Leff at George Mason University, the hardship in the airline industry “is the product of both direct government action prohibiting or restricting flights and consumers’ unwillingness to fly owing to their fears of being infected by the virus or infecting others. Canceled and postponed flights mean sharp declines in revenues but not a reduction in fixed costs. Passengers aren’t booking many new flights, so there’s little revenue coming in. Further, as airlines cancel flights, the costs of refunding tickets that have already been purchased also mount.”
Delta’s daily cash burn stands around $50 million. The company has taken other steps to mitigate the financial aspect of the outbreak, including a company-wide hiring freeze, deferring $500 million in capital expenditures, and delaying $500 million of voluntary pension funding.
In summary, airlines have been struggling financially for months now. And it is still not possible to know when any airline will be able to go back to full capacity and improve its revenue levels again.
If you are not yet a shareholder in DAL stock, you may want to see Q2 results that are expected in late July. By then, both the public and investors may have a better feel for how summer travel is developing and whether a second wave of the pandemic will impact the country.
Recent Price Action Urges Caution
DAL stock’s 52-week price range has been between $19 and $63 per share. As I write, the price is hovering around $29. If you were brave enough to invest $1,000 in Delta shares in late March, you’d now have $1,500.
If you are an investor who also pays attention to technical charts, short-term price action urges caution. DAL is likely to be volatile with a downward bias, as recent investors may decide to take some money off the table.
It is also important to remember that Delta has already suspended share buybacks and dividends. Therefore, passive income-seeking investors are unlikely to return to the shares any time soon.
From a technical chart perspective, DAL stock price may likely go toward $25. If you are not yet a shareholder, you may first want to analyze the quarterly results in July and wait for a pullback.
But if you already own shares, you may want to ride out any further volatility. Alternatively, you may consider initiating a covered call position. For example, an August 21-expiry ATM covered call would give you some downside protection in the coming weeks. It’d also enable you to participate in a potential up move.
The Bottom Line on DAL Stock
Airline stocks are well off their March lows. Yet in recent days, broader market action seems to be tied to the news around a potential second wave of the pandemic. Amid that uncertainty, retail investors are beginning to question whether airline shares like DAL stock may be suitable investments for the second half of the year.
I’d look to buy airlines at pullbacks. For DAL stock, the level I’d watch would be around $25. Unless travel demand increases, airlines cannot get stable revenue. And without revenue, stock prices cannot continue to recover.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
