Over the past few months, the novel coronavirus has wreaked havoc on both our collective health and the economy. As national lockdowns continue to hammer airline revenues, majors like Delta Air Lines (NYSE:DAL) are arguably better positioned than their smaller counterparts. But that hasn’t saved DAL stock from extremely volatility.
However, embattled shareholders finally have some encouragement. Since late May, DAL stock has enjoyed a remarkable burst in upside momentum. One of the biggest catalysts for the share price was the stunning May jobs report.
Going into the disclosure, several economists predicted doom and gloom. Instead, the economy added 2.5 million jobs, indicating that perhaps the worst is over.
Of course, the improved labor market has direct implications for Delta, as well as competitors such as United Airlines (NASDAQ:UAL) and Southwest Airlines (NYSE:LUV). A major source of revenue for the air travel industry is business travelers. Thus, as companies reopen their doors, you might expect the suits to gradually fill seats that have previously gone empty.
Better yet, increased traveler demand isn’t just based on speculation. According to passenger screening data from the Transportation Security Administration, on June 7, 441,255 passengers went through security checkpoints. That’s the highest tally since March 22 of this year.
Moreover, Delta can expect additional demand over the next several months. When the pandemic first touched down in the U.S., many people fled to rural areas. It’s very possible given lingering fears and recent social unrest that this “great migration” will become permanent for some families. Though cynical, that’s a plus for DAL stock.
Still Too Early to Make a Decisive Call on DAL Stock
For optimists, the May jobs report, along with the return of consumer demand, is enough to take a bet. However, if you don’t have the stomach for sudden volatility you may want to wait a bit longer.
First, Delta announced the suspension of flights to 11 American cities and Ottawa, Ontario. On the surface, this may embolden bulls to gamble on DAL stock. In order to adjust to the new normal, management is doing everything they can to survive. Later, they can scale up their business as demand justifies.
However, it’s fair to point out that cutting your way to growth gives off mixed signals. Furthermore, the move underscores how difficult this crisis has been for airliners, even for the big dogs.
Second, while passenger volume has increased significantly on a percentage basis, such metrics benefit from the law of small numbers. Nominally, though, the impact of the coronavirus has been jaw-dropping. From March 5 through May 31 of this year, passenger volume totaled 23.13 million. But during the same period last year, volume was nearly 147 million.
All told, the deficit during this time frame is $123.85 million. In other words, if passenger volume suddenly returns to normal right now, the airliners would still have to contend with a near-124 million passenger deficit for the year.
Truly, this is an unprecedented calamity for the industry. In 2007, U.S. air traffic passenger miles totaled 607.6 billion. In 2009, this stat dropped 9.2% to 551.7 billion. Considering that present traffic is still under 20% of normal capacity, we could see a ridiculously low tally this year.
What’s really startling is that airliners struggled mightily during the comparatively milder Great Recession. Who knows what could happen to this sector over the next several months?
The Labor Market Isn’t All That Great
Another concern I have for DAL stock is that the labor market isn’t nearly as healthy as the Trump administration would like you to think it is.
First off, there has been some skepticism about the accuracy of the Bureau of Labor Statistics’s methodology for this particular report. But even if you take the numbers at face value, there isn’t a lot to be excited about.
Primarily, most of the job gains came from the leisure and hospitality segment. Frankly, that’s not terribly surprising due to states gradually reopening their economies. Further, the hospitality industry was one of the first to crumble, so it’s logical it would be among the first to recover.
Also, let’s face facts — not too many workers in leisure and hospitality are getting rich from their jobs. In other words, the U.S. cannot depend on an army of waiters and baristas to lead the economic charge. Nor does this consumer segment offer the most return for DAL stock.
Instead, Delta should key in on the professional and business services sector, which is more likely to send suits flying across the country and perhaps the world. Though this segment saw a modest lift in May, it arguably wasn’t enough to generate confidence.
Ultimately, you should be careful about booking a flight with DAL stock. It’s riding more on emotions than substance.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
