After an extraordinary rally in June that took shares of Delta Air Lines (NYSE:DAL) to above $35, investors are cautious this time. With the resurgence of the novel coronavirus in various states in the U.S., airline traffic could worsen further. DAL stock will face enormous near-term risks as its cash burn intensifies.
Despite flying high in the past, investors should demand a steeper discount to price the unknowns of the pandemic. The fall and winter seasons are fast approaching. Flu season could hurt travel numbers in the coming months.
DAL Stock Could Fall
The Transportation Security Administration posted total traveler throughput in the 530,000 to 747,000 range last week. In a seasonally busy period for vacation travel, the figures are poor. To lower its costs in light of weak demand, Delta will need to shrink.
It forecast a massive $3.3 billion charge to pay for voluntary retirements. The Detroit News reported that “At least 17,000 employees have signed up for the plans, excluding pilots who have additional days to decide.”
In the third quarter, another 45,000 took voluntary unpaid leave. This helped ease expenses but the continued lack in travel demand will pressure DAL stock. Fortunately, Delta cut its daily cash burn to $27 million a day in June. This is better than the $100 million a day it lost in March.
Delta had $15.7 billion of liquidity at the end of its June quarter. This includes funds received from the CARES Act Payroll. Assuming cash burn rates do not get better, the firm has 19 months of liquidity. The airline may pay for its upcoming debt maturities, averting any risks of bankruptcy.
Delta management prepared for the weakness ahead when it raised cash early and cut costs. The investor play is still a gamble. The bet of a rebound in air travel is difficult to time.
In late May to early June, it looked as though the U.S. contained the spread of the coronavirus, but cases surged to new levels in the last few weeks. Any rebound will not match historic highs in 2019.
CEO Ed Bastian said “I just don’t see 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.”
Investors should brace for weak growth in the coming years. Airlines will likely post sales growth worse than historic levels.
|Delta Stock||Industry||S&P 500|
|Sales Growth Next Year||70.10%||77.20%||11.60%|
|Sales 1‑Year Chg (%)||-25.50%||-11.40%||17.40%|
|Sales 3‑Year Avg (%)||-5.10%||1.80%||13.20%|
Still, Delta has a strong business model. The CEO said, “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.”
Business Demand Recovery
Investors will have an easy time modeling Delta’s rebound. By monitoring business travel demand, shareholders will get a better idea of when losses will shrink. Most certainly, business travel will improve in 2021. Of course, everything depends on the pandemic easing worldwide. And as the cases in the U.S. show, the curve did not yet flatten.
Buying Delta Air Lines is this time is no more than a value bet. The stock will not bounce back by much until air travel demand grows at a consistent pace. Restrictions on travel and fears of catching the virus will hurt near-term demand. Conversely, buy and hold investors who are willing to wait two or more years may start a very small position at these levels.
As of this writing, the author did not hold a position in any of the aforementioned securities.