Chalk another headline up to this weird year. Delta Air Lines (NYSE:DAL) announced it lost a whopping $5.7 billion in the second quarter, and the market celebrated by sending DAL stock higher.
Crazy headlines like that can only happen during the year of the novel coronavirus.
These are unprecedented times, particularly for airline stocks. The Covid-19 pandemic decimated air travel as billions of people heeded — at least for a time — stay-at-home orders and social distancing in an effort to reduce infection rates.
For example, in mid-April, the Transportation Security Administration saw only 87,534 travelers go through its checkpoints. That’s just 4% of the traffic TSA had a year before.
The traffic is coming back, ever so slowly. TSA reports that at the beginning of the July 4 holiday weekend, nearly 765,000 people flew. That’s 36% of the traffic seen a year ago.
Delta and its peers are losing billions to be sure, and that’s not going to change in Q3. But there is renewed optimism that Delta has enough cash socked away to help it survive until a Covid-19 vaccine is released.
Delta Earnings at a Glance
Delta reported its second-quarter earnings last Tuesday. Revenue came in at $1.46 billion, with adjusted losses per share at $4.43. Analysts expected revenue of $1.4 billion and a loss of $4.12 per share.
A year ago, the company’s revenue was $12.54 billion.
The company said it lost $5.72 billion on the quarter — its biggest quarterly loss since 2008. A year ago, Delta reported a second-quarter profit of $1.44 billion.
Citing the continuing effects of Covid-19, Delta announced it is scrapping plans to add another 1,000 daily flights in August. It will instead add only 500. The Atlanta-based airline is unfortunately in the epicenter of the second wave of coronavirus infections. Why? Many of the nearby states either reopened too early or failed to heed the advice of medical experts in the spring.
“Demand has stalled as the virus has grown, particularly down here in the South, across the Sun Belt, coupled with the quarantine measures that are going in place in many of the Northern states,” CEO Ed Bastian said on CNBC. “Those two factors are causing consumers to pause.”
The Outlook for DAL Stock
Delta isn’t providing guidance for the third quarter or the full year, citing uncertainty related to the pandemic. But the company’s statements give investors plenty of insight about its financial prospects.
Delta says it cut its daily cash burn from $100 million per day in March to $27 million by the end of June. With $15.7 billion in liquidity at the end of the second quarter, Delta says it has 19 months of cash. It also has a goal to break even by the end of the year.
Part of those cost savings is coming from retiring 100 older aircraft, including the company’s MD-88, MD-90, 777 and 737-100 fleets. Also, more than 40,000 Delta employees volunteered to take short-term unpaid leave.
Because it took federal CARES Act funding, Delta is prohibited from laying off employees until October. But it’s already warning employees of potential cutbacks. More than 17,000 people have signed up for layoffs, Bastian told analysts on the company’s earnings call.
The Coronavirus Is Changing Delta Forever
The reality is that air travel is undergoing a permanent change. Many people aren’t willing to travel during the pandemic. And even after a vaccine is discovered, it’s highly unlikely that many people will alter the way they view air travel for a long time.
Bastian spoke frankly to that on the company’s earnings call, when he speculated that 2019 will be seen as a peak year for air travel.
“The international trips that we’ve all been on where we’ve flown over to Europe for a 2-hour meeting and flown back that does nothing but beat you up, and you certainly be much easily better accommodated over a video call, but it’s going to be trips that are focused on relationship building, interacting, whether it’s with your customers, conventions, new contacts, reviewing performance on a global scale, those are going to stay. I just don’t see a –there’s a substitute for that over time. It will take some time to get back. I don’t think we’ll ever get back entirely to where we were in 2019 on the volume of business traffic, but the resiliency of the business traffic that we are going to now bake into our business model going forward, I think, will be a better way to measure the sustainability of the recovery.”
The Bottom Line on DAL Stock
At this point, Delta stock is down 55% year-to-date, trading around $26.50 per share. And while Delta’s travel numbers may never get back to 2019 levels, I’ve got some optimism that DAL stock will eventually rebound to near its 2019 highs in the low-$60 range.
Admittedly, I’ve been a Delta bull and I included DAL stock in my list of top travel stocks to buy. For investors with a long time horizon, I think buying DAL stock low and holding it for two years or so is a solid bet to double your investment.
I’m confident that Bastian’s restructuring plan to remake Delta in a smaller, more efficient airline is the best way to return DAL stock to profitability.
But remember, this is a long-term play. If you want a quick return, put your money somewhere else.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he was long DAL.