Cheap tickets are easy to find these days but the same cannot be said for airline stocks like Delta (NYSE:DAL). News of a potential novel coronavirus vaccine breathed new life back into airline shares like DAL stock, signaling their imminent return to the skies.
Recovery of the sector was visible this Thanksgiving when travel hit its pandemic peak.
Airlines are now looking for ways to put their dark days behind and focus on a strategy for the future. Among the top names, DAL stock is poised for a strong comeback as we head into 2021.
DAL Stock Soars on Vaccine News
Despite a harsh Covid-19 winter and federal regulations in place, travel hit a pandemic peak this Thanksgiving. Data from the TSA and private airline carriers show that millions of Americans took a flight during the break.
One of the major reasons for the recent travel surge is due to the Covid-19 vaccines. Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA) and BioNTech (NASDAQ:BNTX) announced that its vaccine is more than 90% effective. Investors rejoiced at the news pushing airline stocks to new highs.
Delta is a major beneficiary of the Covid-19 vaccine boost. As noted in my previous article the airline is in a much better position than its peers. Delta boasts a strong liquidity position and managed to reduce costs this year. In addition to its strong bottom line, the airline also took the necessary steps to implement social distancing guidelines. Delta is one of the few airlines that commited to blocking middle seats during the holiday travel season. This helped alleviate the fear of traveling among passengers as cases continue to rise.
Delta’s management also remains confident in its eventual recovery in 2021. The company says it will narrow its cash burn to just $10 million to $12 million a day. Revenue for its fourth quarter is expected to be lower in a year-over-year comparison but still a far cry from its April lows. In addition to this Delta has also raised $25 billion in funding since the start of the pandemic. This will help lower costs as it heads into recovery mode.
DAL stock may not look too appealing right now, given that air travel is nowhere near its pre-pandemic levels. However, analysts are hoping for a better 2021, making this a great stock to buy at a discount.
No Pilot Furloughs in the Cards
Unemployment in the travel sector was common this year, given the low passenger numbers. However, amid the sea of layoffs, Delta airlines came to an agreement with its pilot union last month. The company agreed that it would not sanction the furlough of 1700 pilots in exchange for a pay reduction and fewer guaranteed hours for other employed pilots. The agreement was approved last week, making it a huge win for the airline and its employees.
Delta’s deal with the pilot union to avoid furloughs has a number of benefits for the company. One, a major reason for the furlough was to reduce the airline’s capacity and employee costs. As part of the agreement, Delta is able to achieve just this while still keeping pilots employed. The 1,700 would-be furloughed pilots will only be paid for 30 hours of flying as opposed to the regular 60 hours. The remaining pilots will have a 5% reduction in their guarantee.
Second, having pilots on hand has a two-fold advantage. Delta will not be required to re-hire additional pilots in the event that it increases capacity in 2021. Adding to this, new pilots will also need to be trained. This is a cost that Delta won’t bear if the pilots are still employed. The ability to keep its pilots employed is not a sign of a comeback but it will help DAL stock ease into the recovery process in 2021.
The Bottom Line on Delta
News of Delta avoiding pilot furloughs is a beacon of light in the otherwise dim airline industry. Major carriers have shed nearly 70,000 employees as costs continue to rise amidst the pandemic. As reported by CNBC, airlines have lost more than $20 billion in the last two quarters.
On the flip side, Delta managed to avoid furloughs thanks to union agreements and pay cuts. But this still means that the road to recovery for the airline will be turbulent, to say the least.
Nevertheless, I still stick by my prior consensus that Delta Air Lines finds itself in a great position as the travel sector continues to lag. DAL stock is a great buy at its current price.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.
