Demand for flying is steadily increasing amid declining fear about the novel coronavirus. That bodes well for Delta (NYSE:DAL) stock.
Delta’s cash burn has tremendously decreased and is quite manageable. Also, the recent spike in coronavirus cases in a few locations is not going to result in the type of all-encompassing closures we experienced earlier this year, and a vaccine looks poised to be unveiled sooner than many expect.
Given these points, longer-term investors should definitely buy DAL stock.
Demand for Flying Is Rising and Delta’s Cash Burn Has Sunk
The number of travelers passing through TSA checkpoints was down 79% year over year during the week that ended June 29. That sounds dreadful, but it’s much better than the year-over-year drops of over 90% that were occurring until Memorial Day Weekend.
Moreover, as I pointed out in a previous column, United (NYSE:UAL), showing confidence that demand would continue to increase, plans to triple the number of its flights from June to August. As a result, in less than one month, the airline’s daily flight total will be down only 40% YOY. In light of those statistics, it’s clear that the airline sector’s business is no longer decimated.
I’m far from surprised by the fact that Delta’s daily cash burn has dropped tremendously. Delta was burning about $100 million a day in late March and had cut that to $50 million per day by May. Now its cash burn is about $40 million per day.
The combination of steadily rising demand and cost-cutting measures have put Delta on much firmer financial footing. In fact, with liquidity of more than $15 billion as of the end of last month and demand continuing to climb, Delta will almost definitely not need to raise more money during the pandemic.
Turning to the math, past pandemics in the U.S. have lasted around 12 to 18 months. If the current pandemic lasts another 14 months and Delta’s daily cash burn remains around $30 million per day, or $900 million per month, it will burn about $13.5 billion. But in that scenario, the company will still not have to raise additional funds.
That scenario, however, will not materialize. As the virus continues to weaken, new drugs are employed against it, and Americans’ fear of it drops further, demand for flying will continue to climb. Moreover, Delta has indicated that it plans to cut costs further; CEO Ed Bastion has said that the company will save money by retiring planes.
Moreover, he has not ruled out eliminating jobs starting in October, when the prohibition on layoffs included in the airline’s government bailout package expires.
But it increasingly looks like the entire coronavirus crisis could be over in mid-autumn. That’s because, as I reported previously, AstraZeneca (NYSE:AZN) sounds pretty confident that it will have a vaccine by then.
Economies Won’t Be Closed
For many reasons, the current rising number of coronavirus cases, in all likelihood, will not result in massive closures of non-essential businesses again. First of all, thankfully, death totals, even in the affected states, have generally been below the levels that we saw in April and May.
Moreover, I think that policymakers realize that the closures were very destructive in many ways. Of course, the closures were horrible for the economy. But additionally, I’ve seen various data points indicating that the lockdowns caused large increases in suicides and drug overdoses, while the fear they inspired led many people to avoid getting treated for life-threatening illnesses.
And finally, there’s evidence that the closures did not work. For example, Sweden, which never imposed a lockdown, had a coronavirus death rate of 527 per million as of the morning of July 2, while Michigan, which imposed one of the strongest lockdowns in the U.S. and probably the world, had a fatality rate of 621 per million.
I believe this is the first time in history that extensive lockdowns were tried as a means of combating a pandemic. I think government officials will realize that the results indicate that they were not effective and were certainly not worth the trade-offs.
In the future, officials will employ other measures, including limited closures of certain problematic activities such as bars and large indoor gatherings, along with mask requirements and measures to protect the vulnerable. But they will not resort to massive closures.
Consequently, Delta and other airlines will not again see the massive declines in demand that they experienced earlier this year.
The Bottom Line on DAL Stock
Given the increases in demand for flying, Delta’s strong financial position, and the high likelihood that no additional massive closures will be imposed, Delta’s longer-term outlook is quite positive. Therefore, investors should buy DAL stock.
As of this writing, Larry Ramer did not own any of the aforementioned stocks. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.
