Delta Air Lines (NYSE:DAL) stock will benefit from the company’s measures to lower expenses and preserve liquidity. DAL stock will get a boost from these efforts.
For example, Delta told its annual meeting guests that it has lowered its average daily cash burn to $30 million during June. This is lower than its previous guidance that it would be running at $40 million per day by the end of the second quarter.
Moreover, CEO Ed Bastion said at the annual meeting on June 18 that Delta had reduced its operating expenses by 55% during the quarter. An even more positive note was that its net cash sales are tracking net positive for the past several weeks.
Lastly, he said that the company still expects to get to zero cash burn by the end of the year.
One way the company expects to get there is by adding in 1,000 new flights during both July and August. That will increase the schedule of flights to 55% to 60% of where it normally would be. After that, Delta will evaluate whether the number of flights should rise or not.
Delta’s Liquidity Situation
Bastion says Delta now has $15 billion in liquidity. With cash burn at $30 million per day and declining, the company will drop less than $2.7 billion (i.e., 91 days x $30 million per day).
For example, let’s say that the average cash burn is $20 million during the third quarter. That would lower the liquidity by $1.82 billion to $13.18 billion. And assuming the fourth-quarter burn is $10 million per day, liquidity would fall to $12.72 billion by the end of the year. In fact, Bastion said its liquidity would be “more than $10 billion by year-end.”
This leaves plenty of room in case the actual experience turns out to be much worse than this. This might happen if the current resurgence in the novel coronavirus pandemic significantly lowers airline traffic again.
However, Bloomberg reports that Bastion has recently forecasted that the airline would be breakeven by the next spring.
What Will Happen With DAL Stock?
Recently DAL stock has been falling along with other travel-related companies. A recent rise in Covid-19 cases is the cause. The assumption is that fewer people will travel.
So far, that is not filtering through the TSA airport traffic numbers. For example, the weekly average traffic has improved to 78.9% of last year for the week ending June 25. Two weeks ago the weekly average to June 11 was 83.9% of last year. That is an improvement of 4% over the past two weeks.
Moreover, there may be somewhat of an effect called “build it and they will come” from the movie Field of Dreams. In other words, the more flights that the company puts on, the more travelers will show up to fill them.
Keep in mind as well that Delta has limited its load factor to 60% to the end of September. If the company decides after that there may be more seats it can sell. This, again, will have a positive positive effect on DAL stock.
What To Do With DAL Stock
I believe there is a very low probability that DAL stock will fail or the company will enter bankruptcy. Therefore, investors who already have a position in it should look to average cost while the stock falls.
One way to project the value of the stock is to imagine where DAL stock might be once the company is at breakeven. After all, that is where the CEO says the company will be at by spring.
I believe that DAL stock will likely be close to where it was during the middle of first quarter. For example, it traded roughly between $30 and $60 during that quarter. Let’s call it $45 on average.
Therefore, that represents an average gain of about $18 from today’s price of $26.91 on June 26. That represents a gain of over 67% in about nine months or so. That sounds like a pretty good return, despite the likely variance, to most investors.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
