Delta Air Lines (NYSE:DAL) looks like it will survive. As a result, I’ve changed my mind since I last wrote about the company. Just a few weeks ago I was worried that the company didn’t have enough liquidity for DAL stock to survive.
Now, I believe that Delta’s management is working to avoid bankruptcy at all costs.
As of Friday, May 29, DAL stock had fallen to $25.21. This is down from $28.53 at the end of March, and $58.48 at the end of December 2019. Moreover, the stock has been bouncing around in the mid-$20 range during most of the second quarter.
So far, the market does not seem to believe the company will fail. But there is no real conviction in the stock price that indicates the company will rebound any time soon.
At a recent conference, Delta said that its main goal is to reduce its cash burn down to zero by the end of the year. As of May 19, the company said its daily cash burn was down to $50 million per day, according to CFO Paul Jacobson. Delta also expects the daily burn to drop to $40 million per day by the end of June.
This is similar to the cash burn at American Airlines (NASDAQ:AAL). I pointed this out in a recent article where I also show that management at that airline hopes to get its net cash burn (after revenue) to $20 million per day. That goal is for the end of Q3 2020.
Both airlines expect demand to pick up, which will allow cash flow to break even by the end of the year.
Liquidity Should Cover the Cash Burn at Delta
At the same conference on May 19, the CFO said its cash balance will be $12 billion by Q2 end. That is because it expects cash burn will be cut in half by the end of Q2. With that information, we can measure whether there will be enough liquidity to last until break-even cash flow.
For example, let’s assume the average daily cash burn rate during Q2 will be $60 million per day. That will cost the company about $5.5 billion during Q2. Assuming the company still has $12 billion by the end of June, the Q3 cash drawdown will be much slower.
If the average daily rate in Q3 is $30 million (halfway between $40 million at the end of June and $20 million at the end of September), the cost will be just $2.7 billion. I assume that the burn rate includes things like changes in working capital and capital expenditure spending. This would keep the cash balance at $9.3 billion even at the end of September.
Assuming the Q4 burn rate slows to $15 million per day on average, the total cost will be just $1.4 billion. That would still leave available cash of $7.9 billion by the end of the year. This is when the company says it expects to reach break-even cash flow.
Moreover, the company says it will have $6 billion to $7 billion in unencumbered assets by the end of Q2. That means theoretically it could use these assets to borrow more money than the $12 billion it will have available by June 30.
So based on these estimates by the company, I feel fairly confident that the company will survive.
What Will Happen to DAL Stock?
Right now the book value per share for DAL stock is $22.52. So it is now trading a bit above that valuation. I now believe the stock will rally based on other factors than its balance sheet.
For example, once there is the slightest evidence that airline travel is starting to pick up the stock will jump. Once “demand,” as the airline calls it, appears to be rising, DAL stock will move up quickly. Traders will rush forward and then ask important questions later.
This is typical of how markets work. They tend to discount the future six to nine months ahead of time in the stock market. I suspect that means that if summer travel picks up, DAL stock will move up quickly by the end of Q3.