The novel coronavirus pandemic has had a crushing impact on the airline industry. Already in 2020, there have been multiple bankruptcies in the sector, including LATAM, RavnAir, Flybe and Virgin Australia. The latest victim is Virgin Atlantic, which filed for bankruptcy protection on Aug. 4. Virgin’s bankruptcy is different, though, because Delta Air Lines (NYSE:DAL) has a 49% stake in it. The move actually resulted in DAL stock popping 1.8% on the day.
Virgin Atlantic Declares Bankruptcy
The reservations of U.K.-based Virgin Atlantic have plunged by 89% so far in 2020. In the second half of the year, demand has been just 25% of 2019 levels. The airline flies international routes exclusively, which makes it especially vulnerable to the pandemic’s travel restrictions.
Virgin Atlantic received $1.57 billion as part of a rescue package that was approved in July by its shareholders, including Delta. While Delta would not have contributed additional funding under the deal, it did agree to defer payments owed by Virgin Atlantic. That funding was supposed to have carried the airline through its next 18 months of operation.
On Aug. 4, Virgin Atlantic filed for Chapter 15 bankruptcy protection in U.S. courts. The move will provide relief from creditors while the airline restructures.
DAL stock closed up 1.8% on the news.
How is Delta Performing Compared to Other Airlines?
We are reaching the point in this crisis where winners and losers in the airline industry are beginning to become clear. The visible losers, of course, are the dozens of smaller regional and international airlines — including Virgin Atlantic — that have been forced into bankruptcy.
Investors in the big four airlines have been feeling the pain as well. They are all bleeding cash. In the first quarter, Delta was burning $100 million per day. When it released its Q2 results in July, Delta said that by June it had reduced its daily cash burn to $27 million.
DAL stock is down 54% so far in 2020, but it is up over 50% from its 52-week low of $17.50. United Airlines (NASDAQ:UAL) is down 61% this year, but it is up over 80% from its 2020 low. Southwest Airlines (NYSE:LUV) has taken a 39% hit so far in 2020, but it has bounced back nearly 50% from its low point.
The Bottom Line on DAL Stock
Is the worst over for Delta? The Virgin Atlantic bankruptcy doesn’t look good on the surface,. However, if the firm’s bankruptcy application is approved, it will help to protect Delta’s investment in the airline.
The next hurdle will be when the government’s funding runs out at the end of September and forces airlines to carry out layoffs. And unless the U.S. can get the pandemic under control, international travel is going to be a non-starter this year.
Airlines are a risky bet in 2020, especially with the termination of government support looming.
How will the market react to the fallout from layoffs? The reality of the situation may hurt the already fragile airline stocks. On the other hand, InvestorPlace contributor Nicolas Chahine argues that the worst is over for the sector. He makes the point that the Big Four airlines have secured enough credit to keep flying for many months, even if passengers are slow to return.
He also contends that three of the stock in the group, including Delta, are buys for long-term growth investors.
Other analysts agree with that take. Those polled by CNN Money have an average rating of “buy” on DAL stock. Their median 12-month price target of $35.50 is over 30% above the current share price. If the recovery trend continues, Delta will be a bargain at its current levels.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
