Don’t Lose Hope on Delta Air Lines Despite Dismal Q2

Cutting costs and streamlining operations may facilitate a comeback in DAL stock

It’s not a great year if you are invested in the airline sector. The novel coronavirus pandemic has wreaked havoc on the U.S. economy in general, but it has been particularly brutal on airlines. All the major carriers are busy shoring up their balance sheets to make sure they have enough funds to survive this crisis. That means a lot of debt at a time when revenues are nonexistent. That’s why it should come as no surprise that, year-to-date, Delta Air Lines (NYSE:DAL) stock is down almost 57%.

a Delta (DAL) plane flying through the clouds
Source: NextNewMedia / Shutterstock.com

But I believe there is more to the story than this. Every carrier has had its strategy in response to the pandemic. Some like American Airlines (NASDAQ:AAL) have decided to dig their heels in while others like DAL have decided to streamline operations and cut costs. I believe the latter stands to be in better shape during and after this crisis.

That’s not to say that there aren’t any problems. The latest quarterly results are sobering and reinforce the fact that it will be a long road to recovery. However, there are bright spots as well. The U.S. government remains committed to supporting the airline industry, and daily cash burn is going down with each passing month.

Ultimately, DAL stock is for those investors that can put their capital in for the long haul. If you are looking for quick returns, you won’t find them here.

Cash Burn Is Coming Down

The keyword for the airline industry in these trying times is survival. Despite encouraging numbers from the TSA, I still believe it will be a long time before we see numbers returning to pre-pandemic levels. Sure, there are reports that we could have a Covid-19 vaccine by the fall, but old habits die hard.

During this pandemic, we have seen unprecedented use of Zoom Video Communications (NASDAQ:ZM) and Slack (NYSE:WORK) applications. The fact that several companies were able to shift their work online and reduce business travel successfully leads me to believe some permanent trends will develop due to Covid-19. Chief executive Ed Bastian himself said, “The number of trips that the average road warrior takes I’m sure is going to come down in certain cases,” when speaking to analysts.

Long story short, it will be a long time before we see air traffic return to normal levels. In the meantime, DAL and other carriers will need liquidity to survive. At the end of the second quarter, the company had $15.7 billion in total liquidity — achieved through a mix of drawing on credit facilities, government support through the CARES Act, and sale-leaseback transactions.

In detailing its financial results, Delta said it has acted aggressively and reduced cash burn to $27 million a day. That’s a steep drop from almost $100 million a day at the height of the crisis. What’s more, assuming the cash burn remains at this level, it gives the company a lifeline until January 2022.

Streamlining Operations

Delta management deserves a lot of credit for cutting costs and streamlining its operations. That is the primary reason why the carrier has managed to cut down costs so significantly within a short space of time.

Delta has shelved its MD-90, MD-88, 737-700, and 777 and fleets. The company has also offered early retirements and voluntary unpaid leave, which thousands of employees have taken. A hiring freeze for all nonessential staff has also been instituted and salaries for officers and directors have been slashed by 50% and 25%, respectively.

Overall, the company has managed to reduce operating expenses by $5.5 billion. Granted, a lot of these costs savings have to do with fuel expense going down due to the pandemic, but retiring older fleets, grounding over 700 aircraft, and cutting staff costs also played a part.

My Final Word on DAL Stock

Airlines are working in a dynamic environment — ever-changing and full of potential pitfalls. So, if you are not in it for the long haul, I think it would be best to stay away at this point. Price targets indicate that out of its peer group, DAL stock will grow the most — a heartening sign. However, don’t let this instill a false sense of optimism.

Table showing the price targets for American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE: DAL), and Southwest Airlines (NYSE:LUV).
Source: Chart by Faizan Farooque, data from Refinitiv

For the next 12 to 18 months, things will slowly get back to normalcy. Although I agree that air travel demand might not ever reach pre-pandemic levels, I also do not agree with the skeptics. We’ve seen how people reacted when Las Vegas lifted lockdown restrictions and allowed casinos to open up.

People want to see the back of this pandemic so they can get back to the way they lived. That includes air travel for business and personal reasons. Refunds are going down, and interstate travel is on the rise.

DAL stock remains a buy for me, provided you are in for the long haul.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/dont-lose-hope-dal-stock-despite-dismal-q2/.

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