Delta (NYSE:DAL) Flights DL88 and DL90 recently marked the end of a long and illustrious flying career for both the MD-88 and MD-90 aircraft. On June 2, Delta finally put the elderly planes out to pasture after 34 years of service. Delta is taking the opportunity to rightsize its fleet as a result of the novel coronavirus. If you own DAL stock or are thinking of buying, the move personifies what’s wrong with Delta.
Here’s why I think this way.
The Average Age of Its Fleet
According to a 2019 article by The Points Guy contributor Ethan Steinberg, “Delta has an average fleet age of 15.8 years, with its 112 MD-80/90 aircraft averaging 26 years of age.”
Steinberg highlighted the fact that KLM retired a 747 in 2019 after 30 years in service. It’s possible I flew on that plane back in the 90s on one of my trips to Europe. And, yet, it was still flying because it was well-maintained and able to do the job.
That might be so, but if you were to rent a car on your next vacation, would you be okay with a 30-year-old vehicle because the rental company certified it was well maintained? I don’t think so.
But airlines like Delta are able to get away with this kind of nonsense.
I don’t care how well maintained a plane is, and how cushy the seats are, passengers should expect a certain level of service, including a reasonably youthful fleet of planes.
Share Repurchases of DAL Stock
It might not be so galling for Delta to have such a geezer fleet if it hadn’t paid out so much cash to shareholders over the past seven years.
In Delta’s 2019 annual report, the company reminded investors that it had paid out $15.3 billion to shareholders since 2013, including $11.5 billion in share repurchases. Those repurchases lowered the share count by 25%.
Assuming Delta didn’t pay out dividends over those seven years and made no share repurchases, the airline could have bought new aircraft. For example, that money would have paid for 37 Boeing 777-9 aircraft ($408.8 million each) at the high end and 185 Boeing 737-700 at the low end.
More importantly, the share repurchases created a false sense of earnings growth for DAL stock investors over those seven years. Long-time shareholders ought to be livid with the $5.4 billion the company has taken from the Treasury Department ($3.8 billion in payroll grants and a $1.6 billion unsecured, 10-year, low-interest loan) to stave off bankruptcy.
Consider that Delta earned $7.30 a share in 2019. In 2012, the company earned $1.19 a share. That’s a seven-year, compound annual growth rate of 29.6%. However, its net income, in absolute terms, grew by 24.8%. Still a good rate of growth, but that’s on the back of an aging fleet.
Basically, the airline was robbing Peter to pay Paul. If not for Covid-19, who knows how long Delta would have kept its MD-88 and MD-90 aircraft flying?
And yet the airline industry finds it perfectly acceptable to run aging fleets while nickel-and-diming its passengers and shortchanging rank-and-file employees – in 2019, CEO Ed Bastian’s total compensation was $17.3 million, 147 times the median pay of the rest of the airline’s employees – while screaming poor us to the federal government.
Frankly, as capital allocators go, the airline industry has to rank near the bottom.
The Bottom Line
In January, CNN Business discussed how every eligible employee at Delta would get a 16.6% profit-sharing bonus to reward them for the airline’s strong performance in 2019. The article pointed out that the $1.6-billion payout was a record amount. Further, it’s not the norm to provide employees with cash profit-sharing in America; only 38% got one in 2018.
So, Delta isn’t entirely miserly when it comes to its employees.
But what do you think is going to happen to the estimated 7,000 excess pilots at the airline when sales don’t return as quickly as expected?
Well, once you take into account voluntary retirements, approximately 2,500 to 3,500 pilots will be furloughed or about 25% of its pool of pilots. Further, wait until October 1, when Delta and the rest of the airlines will be able to cut jobs.
“Slash hours now, fire workers in October, and stockpile billions of dollars that were intended for workers in order to subsidize ongoing airline operations and gain a competitive advantage over any carrier that used the funds as intended to maintain jobs, paychecks and benefits,” Sara Nelson, president of the Association of Flight Attendants wrote in a letter to the U.S. Senate Commerce, Science, Transportation Committee in early May.
In that letter, Nelson specifically pointed to Delta’s labor practices when addressing the treatment of the workers she represents. It’s not hard to imagine labor problems continuing to boil over in the coming months as airlines look to bring down their daily cash burns.
The company, along with the rest of the airlines, in my opinion, are guilty of poor capital allocation. The fact that Covid-19 allows it to reduce the age of its fleet doesn’t change this reality.
Investing in DAL stock right now seems like a losing proposition. Caveat emptor.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
