Airline stocks enjoyed a remarkable run at the stock market as airline traffic rises off April lows. Delta Airlines (NYSE:DAL) stock is up 60% in the last month after bouncing off March and April lows.
U.S. airlines are expected to carry 29.6 million seats on domestic flights, which is up 29% from May but down 66% from the year-ago level. In catering to the rebound in traffic, American Airlines (NASDAQ:AAL), Delta and United Airlines (NASDAQ:UAL) have collectively gotten out 150 stored jets back into service since mid-May.
The uptick demand is encouraging, but it’s still nowhere close to the pre-pandemic levels. However, it will aid airline companies in lowering daily cash burn. Delta, in particular, was burning $100 million a day at the end of March, but through effective belt-tightening measures, it has limited cash burn to $40 million a day.
With a healthy operating cash flow of 40.4%, keenness to embrace change and its relatively strong liquidity figures, Delta is an impressive long-term play.
How Worrying is Delta’s Debt Position?
Delta’s management recently announced that the company might default on some of its debt obligations if it isn’t able to renegotiate its terms. The company feels that it would not be able to satisfy minimum “fixed charge coverage ratios” for its debt obligations by early 2021.
The news has had investors worried about the company’s future ending DAL stock’s week-long rally.
On an overall front, the company is one of the legacy carriers having a pristine balance sheet. It has ample cash and financial flexibility to get through the pandemic. It raised more than $10 billion since early March, which includes senior secured notes worth $3.5 billion, two loan facilities worth $4.4 billion and an additional $3.8 billion government funding under the CARES Act for payroll support.
Additionally, the company expects to have roughly $14 billion in cash and cash equivalents by the end of this month.
Delta has also done a fantastic job of reducing operating costs to reduce the daily cash burn by 60% from its March levels. A lot of it is attributable to staff retirements and one-third of its workforce taking voluntary unpaid leaves of 30 days to one year.
Moreover, reduced loads mean fewer passenger and maintenance costs. It has also suspended capital expenditures for the time being. These efforts have reduced operating costs by 50% between March and May.
Embracing the New Normal
It’s no secret that the novel coronavirus pandemic completely altered the landscape for several industries. Specifically, the travel industry is perhaps the most affected sector of all, and the pandemic is expected to usher in a new era of air travel.
Higher fares, enhanced medical protocols, fewer routes, and less free food are likely to be part of the revamped business airline business model. Airline companies who are pro-active in embracing the new normal will benefit the most in these trying times and the foreseeable future.
Medical protocols are perhaps the most obvious consideration for airline companies at this time. Most legacy carriers have significantly improved their safety measures, but Delta appears to edge ahead of the other three legacy carriers based on four safety measures. These measures include blocking middle seats, required face coverings for passengers, disinfecting aircraft and taking passenger temperatures.
Apart from taking passenger temperatures, Delta is ticking all the boxes. The company is limiting passenger loads to 50% in first class and 60% in economy cabins. Moreover, it is distributing essential kits to passengers, which includes snacks, water bottles, and hand sanitizers.
If a place is too crowded, passengers can be adjusted on a different flight free of charge. Face coverings are also mandatory on all Delta flights, and electrostatic sprayers are used to disinfect the aircraft.
Valuation of DAL Stock
As mentioned before, DAL stock is up 60% this month and is currently priced near $31. Airline stocks are rallying in the past few weeks on the back of the increase in traffic and improved investor confidence in the market.
Analysts believe that the mean price target for DAL stock is $35.10, which means that it is undervalued by 14.2%. Due to the volatility in the market over the past three months, the price target for DAL stock has decreased markedly from $66.60 to $35.10, representing a loss of 47.3%.
The recent suspension of dividends has also negatively impacted the stock price. High estimates for the stock are estimated at $47, which is what DAL stock was trading at in early March.
The Bottom Line on DAL stock
DAL stock is for investors looking to scoop up the best of the airline stocks in the market. Though the company will probably be taking a hammering in the second quarter, expect things to change at the tail end of the year.
I believe that the stock price will jump around the high estimates, and now is probably the best time to grab the stock at a significant bargain.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.