Survival Is Not the Issue for Delta Air Lines

Delta Air Lines (NYSE:DAL) will survive Covid-19. But at what cost? And does that you mean you should invest in DAL stock? Let’s take a look at the facts.

Delta (DAL) airlines plane mid take-off

Source: Markus Mainka /

After losing more than $5 billion in the third quarter of 2020, the airline still had $21 billion of cash in the bank.

The reason is that Delta has been borrowing as much as it can, and not just from the government. It listed $35.7 billion of long-term debt as of September, $29.8 billion of it not covered by capitalized leases.  A year earlier the company had just $8 billion of debt beyond its leases.

Despite this, the stock opened for trade Nov. 23 at almost $38 — 103% ahead of its May 15 pandemic low. Bulls pointed out this was more than 30% below where it started the year. Analysts now call Delta a moderate buy.

Are they crazy?

The New Normal for DAL Stock

Delta has won enormous praise during the pandemic, but praise doesn’t pay the bills.

The company has made customer safety its top priority. It’s partnering with CVS Health (NYSE:CVS) on rapid Covid-19 tests. It’s continuing to block middle seats to keep passengers separate. For the tenth year in a row, Delta is rated the top airline to fly by Business Traveler News. CEO Ed Bastian threw “cold water” on the idea of a New York to London “air corridor,” where passengers wouldn’t have to quarantine.

The headlines say more people are flying this week. But more is relative. It’s true that roughly one million passengers per day have been going through airport check-ins recently. But that is still just 40% of the number who went through on the same days in 2019.

Mortgage the Future

To get through the present, Delta is mortgaging its future.

In September, it borrowed $6.5 billion, secured by its frequent flyer miles. The company’s SkyMiles program with American Express (NYSE:AXP) generated $4.1 billion in 2019.

Delta continues to save money wherever it can. Its chief legal officer is among those working for half salary. The company is avoiding tariffs on its new Airbus (OTCMKTS:EADSY) jets by having them tour Europe. It refuses to bring them to the U.S. so long as the Trump tariffs remain in place.

This has a J.P. Morgan analyst suggesting Delta could soon be profitable. It only needs to fly at half its capacity to see positive cash flow. The company has been slow to bring back capacity, meaning it has fewer daily costs, and thus less cash burn, than even Southwest Air (NYSE:LUV).

But even after it becomes cash-flow positive, Delta must start paying down that debt. During 2019, the last pre-pandemic year, the company had $8.4 billion of operating cash flow. It spent $3 billion that year buying back stock and paying dividends. Figure that’s gone for some time. But even during that very good year, the airline retired just $3.3 billion of long-term debt. It could double that by not sharing with shareholders. But it would still take four years of normal operation to bring debts back to 2019 levels.

The Bottom Line

Delta is worth $24.7 billion. This sounds sweet when a normal year brings in $47 billion of revenue, and more than 20% of that hits the net income line.

But a normal year is still some distance away. Delta may not be in full operation until 2023. While many people are willing to fly, many others aren’t. Much of Delta’s potentially profitable future is now committed to debt repayments.

If you’re buying Delta today, you’re getting in too early. It will take years for the airline to reduce its debt levels, as air travel gradually returns to normal. You can speculate on someone buying the stock you buy today at a higher price tomorrow.

Or, you can invest in something that’s making money today.

On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn 

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