At the beginning of April 2020, Delta Air Lines (NYSE:DAL) stock was trading at $23.87. The month hasn’t been particularly kind for DAL shareholders.
Over the next few weeks, Fitch cut Delta Airlines credit rating to junk. In addition, the company recently reported first quarter results for 2020 with a disappointing outlook for the coming quarter.
With all this negative news, DAL stock has remained relatively resilient at lower levels. The stock traded around $22.40 at the beginning of the week and I believe that a rally is likely from those levels. However, profit booking is advisable if the stock moves higher by 15% to 20% in the coming weeks or months.
Starting with the positives, Delta Air Lines ended Q1 2020 with a total liquidity buffer of $6 billion. After the quarter, the company has announced a $1.5 billion senior secured notes due 2025. The company will also enter into an additional $1.5 billion Term Loan B facility.
Overall, the company expects to ramp-up liquidity to $10 billion by the end of Q2 2020. Therefore, from a liquidity perspective, the company is already well positioned to navigate the year.
Furthermore, the company was burning $100 million per day in cash at the end of March 2020. With significant cost cutting measures, the company is expecting cash burn to decline to $50 million by the end of June 2020. Lower fuel cost can benefit Delta Air Lines beyond this period and potentially in fiscal year 2021.
These factors have stabilized the stock at lower levels. I believe that as states begin to reopen the economy, there is likely to be some growth in passenger traffic. This, coupled with liquidity and cost-cutting, is likely to take DAL stock higher.
Sluggish Recovery Can Imply More Pain
I do believe that DAL stock has bottomed out and can rally from current levels. However, it’s still too early to conclude that the stock can continue to trend higher.
Delta Air Lines CEO Ed Bastian believes that “it could be up to three years before we see a sustainable recovery.”
Data from OAG also suggests that it could be FY2022 or FY2023 “before the volume of fliers returns to the levels that had been expected for 2020.”
An International Air Transport Association survey also found that “40% of recent travelers anticipated waiting at least six months after the virus is contained before flying again.”
Clearly, the recovery for the industry is likely to be sluggish. Therefore, over the coming quarters, airline companies will continue to focus on reducing cash burn. Delta Air Lines is well positioned from that perspective.
Another key point to note is that Fitch believes that the company’s leverage will remain above 3x through FY2022. While leverage will be high on a standalone basis, Delta Air Lines might still be attractive on a relative basis.
Fitch expects American Airlines (NASDAQ:AAL) to have a leverage of above 6x for the same forecast period. Similarly, Delta Air Lines has a rating of BB+ after the downgrade. United Airlines (NASDAQ:UAL), on the other hand, has been downgraded to BB- with a negative outlook.
Therefore, from a credit perspective, Delta Air Lines looks relatively better. DAL stock would certainly be worth considering if I had to choose one airline stock for the long-term portfolio.
My Concluding Thoughts on DAL Stock
Delta Air Lines has approximately $20 billion in unencumbered collateral. Further leveraging would therefore not be a challenge in the coming few quarters. The payroll support program from the government and infusion of cash through leveraging is likely to keep Delta Air Lines afloat. If the crisis prolongs, further government support is also likely.
Overall, Delta Air Lines is positioned to navigate the crisis with relatively better credit metrics as compared to some peers. I would therefore keep DAL stock in the investment radar for the long-term.
At the same time, I see some near-term trading opportunity as several states in the U.S. move to reopen their economy. Even with a low capacity, some cash inflow would help in navigating troubled times.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
