Delta (NYSE:DAL) stock is down about 32% over the last three months, and 40% over the last year. However, it appears that investors are warming up to the idea of a summer rally for the nation’s second-largest airline by market capitalization.
Covid-19 did a lot of damage to people’s travel plans, but based on several indications (including the uptick in travel Memorial Day weekend compared to the month prior), it appears that there is a quicker-than-expected return in demand.
Based on The Motley Fool’s reporting, about 620,000 travelers passed through TSA checkpoints on May 30 and May 31. This was almost three times as many passengers as the first weekend of April. Delta is experiencing a higher sale-to-refund ratio than expected, and plans on adding another 100 flights in July. Still, there will be several moves Delta will need to take to justify the newfound outlook.
Lowering Daily Cash Burn
On the cost side, Delta is being proactive to address a whole range of potential revenue scenarios, by reducing costs wherever it can.
It is preparing a strategy to reduce its daily cash burn to zero by the end of the year. During the Wolfe Global Transportation Conference, Delta CFO and Executive Vice President Paul Jacobson stated:
“We’ve already taken actions to reduce our cost base by over 50% in the June quarter year-over-year. … A step down in our cost structure has reduced that daily cash burn from $100 million a day at the end of March to where we currently stand at about $50 million per day. And we now expect this daily can burn to improve to $40 million per day as we exit June, about $10 million better than our original expectations back in April really due to better cost performance and some modest improvement in net sales versus refunds.”
These moves should help DAL stock if the reduction in overall revenue is protracted.
DAL Stock Is Preparing for the Worst
On top of the decisions Delta has made to address its short-term budget gaps, it also needs to confront its long-term structural issues (as they relate to its capital structure) and labor. S&P Global Rating’s managing Director and Transportation Sector Lead Kurt Forsgren expects annual global flight demand to drop by 50%-59% from 2019, and it will more reach pre-pandemic levels until 2023.
Recent capital injections have been made to address this negative forecast. In the most recent capital raise, it was able to “upsize” it to provide more liquidity for its operations. CFO Paul Jacobson expects to have $12 billion by the end of June, $6 billion or $7 billion of which will be unencumbered.
This will be in addition to the CARES act loan, which Delta has already applied for.
Delta will also be accelerating the fleet retirements they had planned for before Covid-19. With these changes, there will be room for more fuel-efficient and cost-effective planes.
Finally, after the government-imposed ban on job cuts expires on Sept. 30, Delta expects to be managing its staff reductions on a voluntary bases, which is typically less expensive, and it will rearrange union pilots for the summer 2021 season.
Smaller Flights, Bigger Uncertainty
It appears that investors like the moves Delta has made, as the stock is up almost 20% this week. At a 5 times price-to-earnings ratio, the price seems attractive, if you believe DAL stock can keep its pace of revenue improvement.
I would still warn investors to take a cautious stance, however. With 60% capacity caps, empty middle seats, and other regulations enacted during the aftermath of the Covid-19 virus, there will be a long road to profitability for the airline industry as a whole. As long as these rules are in place, travel for business and leisure will be less profitable for the foreseeable future, no matter the demand recovery.
As of the time this article was written, I do not hold any positions in DAL stock.
