Delta Airlines – Might Have Bottomed Out – Idaho Reporter

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Delta Airlines – Might Have Bottomed Out

Delta Airlines (NYSE: DAL) is a US-based airline and is one of the country’s four legacy airlines. In 2019, the company had a 17.5% domestic market share. The company has been one of the best performers of the US aviation sector and grew nearly five times over the past decade, which is an amazing achievement considering the cut-throat competitiveness of the sector. 

In 2020 however, the aviation sector and all its corollaries such as entertainment and hotels are facing an unprecedented slump of demand due to the spread of the coronavirus pandemic.

In April, the TSA reported that aviation volumes are down 95% compared to previous averages. As the aviation industry is extremely cost and capital intensive, the government had to step in with a stimulus of $50 billion to help airlines stay afloat and prevent mass unemployment that would follow. As part of the deal, Delta received $5.4 billion dollars, most of which they do have to repay and the rest in the form of an ultra low-interest loan. The sector is also facing issues other than low demand, as social distancing has forced airlines to fly the planes at reduced capacity and mandate the use of masks.

Delta Airlines recently announced that they will be flying planes at just 40% capacity, this will have a huge impact on financials as the reduction in capacity will not be met by a proportionate reduction of costs due to the nature of the business.

After airlines announced their respective Q1 results, Warren Buffett’s Berkshire Hathaway made a surprise announcement of the company making an exit from the entire aviation industry at their shareholder’s meeting. Warren Buffet has a stellar reputation as an investor and his views have huge traction in the markets.

 

At the meeting, Buffett stated that the aviation business will not be the same after the pandemic and he expects the sector to just “chew up money” and capital for a substantial amount of time. The Delta airlines stock was trading 59% down YTD and has dumped another 13% after Berkshire’s exit. (MarketWatch)

All things taken into account, Delta stock has a silver lining and is much better positioned compared to other overleveraged carriers. At the company’s earnings call, Delta’s management stated that 60% of its costs are variable, which is uncommonly high for an airline and hence they will be much more effective at cost-cutting than competitors. It should be noted that Delta’s daily cash burn figures of $50 million a day do not take into account the grants it has received from the government, and with that a 50% reduction in costs paint a whole different picture. Last year, the airline spent $10 billion in Q2, but this year after reductions and grants, it expects to spend $3 billion, down 70%. 

Hence, even with extremely low revenue, the airline will not be burning scary amounts of cash. Currently trading at a P/E of just 3.9x, extremely low for a legacy airline, the stock might have bottomed out today.

DAL stock closed at $21.00 on Wednesday, lets see what the future holds.

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