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Stay Safe and Don’t Board Delta Airlines Just Yet

What was supposed to be its comeback summer quickly turned sour for Delta Airlines (NYSE:DAL). DAL stock took some big hits this past week. The novel coronavirus pandemic was devastating for the airline, leaving flights grounded for months on end.

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

As we approach summer, AKA the biggest travel season of the year, investors expected a rebound in airline stock prices as people celebrated a return to some level of normalcy. Unfortunately, this was not the case for most major airlines that continue to trim flights as coronavirus cases surge in the United States.

If you were hoping to make some market gains on airline stocks this summer, we recommend you standby on DAL stock for now.

A Slow Travel Season for DAL Stock

Delta Airlines was looking to put the past few months behind it as it jumped on the road to recovery this summer. However, with coronavirus cases at its peak in states like California and Texas, the way forward for Delta will be choppy, to say the least.

Prior to the pandemic, Delta was a rising star among its peers as it strived to create a name for itself among premium travelers. The airline did this through a combination of higher flight prices and better services. However, higher profits meant higher risk, and the company stood to lose a lot when the pandemic decimated this industry.

As an airline that earns 55% of its revenue from premium flights, the last few months have been slow for Delta as people hold back on non-essential travel. The company has re-serviced numerous aircrafts, but with ticket prices at an all-time low, revenue numbers remain dim.

The company’s CEO, Ed Bastian, called for the government to help restore public confidence in the airline industry. Delta has also taken precautions to ensure safety by limiting the flight capacity to 60% and making masks mandatory for all passengers on the flight.

A Poor Q2 For Delta

On July 14, Delta reported its Q2 earnings and while investors hoped for some good news, they were in for a rude awakening. According to Yahoo Finance, the airline reported a net loss of $2.81 billion — its largest since the 2008 market crash. Loss per share was at $4.43 while the pre-tax loss was $3.9 billion. The company was not able to meet analyst expectations on all counts.

The result was a culmination of a slow spring with flight traffic for Delta down by 91%. The airline was also forced to reduce its total capacity by 85%. This left net revenues at just $1.2 billion, which is 93% lower on a year-over-year comparison.

However, the Q2 earnings report did show a glimmer of hope for the future. Delta holds a strong liquidity position with $15.7 billion in reserves which will keep the airline afloat until it returns to a full level of operation. In addition to this, the company will also decrease its monthly cash burn rate to $27 million, which is significantly better than the $100 million burn rate in March 2020.

Despite the silver lining, Delta Airlines is definitely not in the clear. The company’s troubling revenue numbers are still a cause for concern for many investors. This is amplified by low business travel in the U.S., which is the company’s main revenue driver. If travel trends continue at the current pace, it might take a while for Delta stock to recover from its losses.

The Government Lends a Helping Hand

Major U.S airlines saw its first loss in decades as travel came to a standstill this spring. With the summer season showing no signs of a resurgence, the industry needs federal aid now more than ever.

After months of calling for government aid, Delta finally closed a deal with the Treasury Department earlier this month. As part of the CARES Act, the government will distribute $25 billion in funds to the airline industry, according to a report by CNBC. Beneficiaries of the funds, in addition to Delta, will include United (NASDAQ:UAL), Southwest (NYSE:LUV), and Jet Blue (NASDAQ:JBLU) among others.

With coronavirus spikes across the nation, airlines are grappling with the losses. The government believes that airlines are an integral part of the economy and “critical to domestic and international travel and commerce.”

While the total amount of aid provided to Delta was not specified, the airline claimed that it was eligible for $4.6 billion in federal aid. However, the money does come with strings attached. Airlines accepting aid will not be allowed to sanction any pay cuts or layoffs till September 30.

Delta’s current situation is less than optimal, but the company’s liquidity position, coupled with the federal aid. does give investors a sliver of hope for the future. Nevertheless, the airline industry has a long way to go to reach its pre-pandemic levels.

Investors shouldn’t expect a turnaround in DAL stock in 2020. Until we see signs of clear skies, it would be best to steer clear of this investment for the foreseeable future.

Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020. As of this writing, Divya Premkumar did not own any of the aforementioned stocks. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/stay-safe-and-dont-board-dal-stock-just-yet/.

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