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For Delta Air Lines, It’s Not About the Middle Seats

Given the infectious nature of the novel coronavirus, it’s no surprise that airliners, even the supposedly resilient ones like Delta Air Lines (NYSE:DAL), have struggled. After a sizable pop in the industry’s equity valuation around early June, the sector retreated immediately. However, DAL stock and its ilk have enjoyed a recent burst of positive momentum. Can this keep up this time around?

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

When you look at the broader fundamentals, you can’t help but notice encouraging signs. Clearly, the biggest indicator is that air travel demand continues to improve. For instance, on August 9, nearly 832,000 people crossed through Transportation Security Administration checkpoints in U.S. airports. This was the highest single-day tally since the crisis tanked travel demand.

True, this figure was only 31% of last year’s volume. And we can’t ignore that these spikes aren’t consistent. Typically, volume is below 30% on a year-over-year basis. But when you compare that this metric was down in low single digits in April, you can appreciate why DAL stock jumped higher on the news.

Even better, according to data from the Centers for Disease Control and Prevention, new daily coronavirus cases have steadily declined since late July. While these figures are elevated, it’s difficult to foresee a complete return to air travel capacity. So, the receding figures are very positive for DAL stock.

Further, InvestorPlace contributor Will Ashworth notes that Delta’s consumer-friendly decision to block out the middle seat through September is not only impressive, it paints a picture of contrast against who do not, such as United Airlines (NASDAQ:UAL).

It’s an issue that Ashworth doubled down on in his latest story about Delta stock. But does it really matter?

DAL Stock Faces Large-Scale Threats

I ask the above question not as a rude challenge but as an honest-to-goodness inquiry. And to be fair, Ashworth does not believe the middle seat is the ultimate catalyst to buy DAL stock. He recognizes – I think we all do – the steep obstacles ahead.

If I’m interpreting correctly, his point is that given the context, Delta has the better chance of scooping market share. But how valuable would that be if the industry continues to suffer wholesale headwinds?

For instance, while we celebrate a 30% capacity level from one year ago, we should also realize that we’re putting lipstick on a 70% haircut. Until this comparison improves substantially, I don’t see a reason to unnecessarily expose yourself to DAL stock.

But the biggest worry I have regarding the airliners is the state of the economy, specifically permanent job losers.

As a ratio of the U.S. labor force, permanent job losers spiked to 1.8% in July. This is significant because since May 2007, DAL stock and this metric shared an inverse correlation coefficient of 78.6%. In other words, the lower the number of permanent job losses, the higher Delta flies. Fundamentally, this makes perfect sense.

DAL stock vs. permanent job losers as percentage of U.S. labor force
Click to Enlarge
Source: Chart by Josh Enomoto

Of course, the spiking of permanent job losses in March and April coincided with the collapse of DAL stock. Therefore, where Delta goes next I believe depends on the state of the labor market. It’s critical because back when the ratio of permanent job losses relative to the labor force was 1.8%, DAL was trading at just under $35, not too far off from where it is today.

Therefore, this implies that if the ratio moves higher, DAL will incur volatility. For example, in March 2013, the ratio hit 2.51% while DAL traded hands at under $15.

A Second Wave Is Becoming a Reality

Contrary to kooky conspiracy news, we may end up having an awful second wave – perhaps the last surge was a warm-up. According to Time, Europe is on the brink of a second wave. Data indicates that the reopening of tourism and high-contact businesses may have contributed to the increased cases.

This will have substantial implications for us back home. Take for instance Sweden. While celebrated by the aforementioned kooks for keeping its economy open during the initial wave, Sweden paid a heavy toll in terms of deaths per capita. Now, people there are urging the government to reconsider its strategy based on what’s happening to Europe.

Of course, eschewing the economy in favor of meeting immediate health needs will likely have longer-term fiscal consequences. And that eventually will lead to poor economic outcomes.

About the only thing that can help the airliners in the nearer term is a robust testing mechanism. If we get that in place, that could change the narrative.

However, you can’t help but feel pessimistic given our struggles with the coronavirus. Therefore, you might want to hold off on DAL stock until we get a better read on matters. In my view, it’s not about the middle seat, it’s about the economy.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/for-delta-air-lines-dal-stock-its-not-about-the-middle-seats/.

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