Delta Airlines (NYSE:DAL) reported its dismal second-quarter results for 2020, which covers the period when the novel coronavirus had its most significant impact on U.S. travel. The company generated only $1.2 billion during the period, down 91% year-over-year. Delta’s loyalty program helped cushion the stunted demand to an extent, along with its credit card partnership with American Express. DAL stock is down roughly 12% this month.
Despite the massive losses in its second quarter, things are improving for Delta and other airline companies. Air traffic numbers are rising as the Transportation Security Administration (TSA) stated that it screened more than 700,000 people on each of the three days over the July 4 weekend.
Additionally, the airline sector has been rallying on the back of some positive developments in the final phase of testing for the Covid 19 vaccine.
Delta has abundant liquidity, and the slowing cash burn suggests that the company can survive until earnings return to an acceptable level. Let’s explore Delta’s condition in a little more detail to assess its current positioning.
Abundant Liquidity and DAL Stock
Delta airlines ended the second quarter with an impressive $15.7 in liquidity. The company is not even factoring in the $4.6 billion loan under the CARES Act in its estimates, even though they were talks that its liquidity levels would dip to $10 billion at the year-end. It has a non-binding agreement with the U.S. treasury and can decide how much loan it can draw down by Sept. 30.
Cash burn has significantly reduced to $27 million per day in June, from its April projections of $50 million per day.
Therefore, if cash burn remains at the near recent levels, I expect the company to exit the year with roughly $10 billion in cash. Though traffic demand remains low, the airline is heading towards cash flow breakeven.
Effective Cost Control Bolsters DAL Stock
Aside from shoring up liquidity, Delta has been highly effective in controlling its costs. Last week it announced that it would be retiring its small sub fleet of 10 Boeing 737-700s this year in addition to retiring the MD-88 and MD-90 fleets in June and its 777 fleets in the latter half of this year.
Moreover, the company plans to shrink its fleet even more soon, specifically its A320s and 767s.
Naturally, these streamlining initiatives will result in millions of dollars in annual savings due to the lower maintenance costs, higher pilot productivity, and increased resilience in recovering from harsh weather patterns.
Another major part of Delta’s belt-tightening measures includes controlling labor costs. Nearly 20% of its 91,000 workforces at the start of 2020, are set to take early retirements or other buyout packages.
Also, the company is seeking to cut the guaranteed minimum pay for pilots by 15% to avoid furloughs. Delta’s leadership is clear about the company’s prospects and the challenges that it faces in the wake of the Covid 19 pandemic. CEO Ed Bastian doesn’t expect an early recovery for DAL stock and feels that business travel may never be the same again.
Positive Recent Developments
Airline stocks have been rallying on the back of recent positive developments with regards to airline safety and the Covid 19 vaccine. Several vaccine programs are reporting positively about the antibody test results.
Though broadly distributed vaccines will not be available until 2021, investors are keen on the growth of the airline sector in the near future.
Additionally, Wall Street Journal‘s Scot McCartney wrote about how airlines are much safer than the current perception. One of the fears is that the air is repeatedly recycled in the cabin, which amplifies the opportunities to inhale the virus.
However, according to Airbus (OTCMKTS:EADSY) Americas’ VP for R&D Amanda Simpson, the cabin is not precisely a sealed tube. Thus, airplane air is much safer from the coronavirus in comparison to other indoor settings such as offices, schools, and restaurants.
Moreover, airline companies such as Delta have all been implementing disinfecting programs and social distancing measures to improve safety. Delta recently announced that it would continue to block middle seats through the end of September.
Final Word on Delta Stock
Despite the massive losses in the second quarter, Delta airlines are on the road to recovery. It has abundant liquidity, and its efficient cost control has limited cash burn to an acceptably low level.
It’s currently trading at $27, whereas price targets suggest that it should be valued at around $35.5. Therefore, Delta stock is a buy as far as I’m concerned.
As per this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.