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Wed, April 5 at 4:00PM ET

Delta Air Lines’ Bold Move Will Reward Patient Investors

Delta Air Lines (NYSE:DAL) chief executive officer Ed Bastian has promised that it won’t sell the middle seats on its airplanes until October to keep passengers happy. Shareholders willing to play the long game will see DAL stock return to the $60s and beyond.

delta (dal stock) airlines plane
Source: Markus Mainka / Shutterstock.com

But you have to be patient. This game is going to take a while to play out. Here’s why.

Forget About DAL Stock for a Moment

I rarely compliment CEOs. Most are overrated and do little to add value to a company’s stock. It’s the people on the front lines who execute a company’s plan that deserve most of the credit.

Sure, someone’s got to come up with the plan, but I would bet if the pilots, flight attendants, baggage handlers, ticket agents, and all the other people needed to run an airline were given a chance to do so, they’d deliver a winning proposal.

However, the fact that Bastian is sticking to his guns and keeping the middle seat empty through September is impressive. This, despite the airline announcing a $5.7 billion loss in the second quarter and knowing that leaving the middle seat unsold costs it substantial near-term revenue, suggests to me that he understands why people are afraid to fly right now.

“When we survey our customers about the reasons you’re purchasing a ticket on Delta, the space on board the plane, the blocked middle seats, has gone to the No. 1 reason why customers are choosing Delta,” Bastian stated during its July 14 earnings call.

It’s not rocket science, people. It’s why I suggested in early June that Southwest (NYSE:LUV) should seriously consider permanently dumping the middle seat. Yes, it will cost billions in the short term, but long term it will make flying considerably more enjoyable for average Joe’s like myself who have to fly coach.

Let’s face it; air travel has been crappy for some time. The novel coronavirus merely made it intolerable. It’s time for a reset. The middle seat is it.

Bastian is so convinced that the middle seat impedes Delta’s ability to get people flying that it could extend the policy into 2021. Do it. You’ll be glad you did. Passengers will remember which airline chose people over profits.

“We’re gonna hear from customers as to their comfort in travel,” Bastian said.

“I’d rather add more flights back and more seats into the market in a safe way than trying to maximize the number of people you can put on an individual airplane.”

The CEO’s reciting the cardinal rule of Business 101: Don’t piss off the customer!

Investors Ought to Dump UAL Stock Instead

Intelligent people know that blocking the middle seat in an aircraft is not going to save them from contracting Covid-19. We know that everyone wearing a mask is a far better preventative measure.

So, the fact that United Airlines’ (NASDAQ:UAL) chief communications officer (CCO) recently chose to belittle passengers for wanting social distancing on flights says to me that it doesn’t care one iota about its customers.

“There’s more nuance to Delta’s middle-seat-blocking policy than meets the eye. On paper and according to science, the more distance you have from your neighbor, the better,” stated The Points Guy travel analyst Zach Griff recently.

“That’s why Delta is capping the capacity of all its flights through the summer. And Delta is winning the public (and press) opinion as the carrier that’s doing the most to keep you safe.”

For United’s CCO to say that Delta’s move is purely public relations fails to consider that Delta’s weighed the costs and made the financial calculation that it’s more profitable, not less, to leave the middle seat empty.

While Bastian has said an empty middle seat can’t go on forever, I would disagree.

I’ve done a quick, back-of-the-napkin calculation of how much it would cost to permanently remove the middle seat (actually remove it from the aircraft), and I’ve concluded it’s about a 30% haircut on revenues.

So, if Delta made, for example, $200 in revenue per passenger in 2019, it would have to generate $260 per passenger under a no-middle-seat scenario.

I’m willing to bet that passengers will pay 30% more for a ticket, to get more space and comfort in coach. And if they’re not, it could figure out how much they will pay, and get the rest from loyalty points, business class, etc.

While we don’t know how this will all play out, I can say one thing for sure: Under no circumstances should investors buy United stock. Delta stock is the clear winner in this so-called “PR” stunt.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/delta-bold-move-benefits-dal-stock-long-term/.

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