Earnings

Is Delta Air Line’s share price grounded?

Grounded planes, almost no customers and huge first-quarter losses - can Delta Air Line’s [DAL] share price ever take off again?

Delta Air Line’s share price has nosedived since the coronavirus outbreak. Without a doubt, aviation is one of the hardest-hit sectors. Grounded planes, virtually no customers and questions about how airlines will now operate in the future have all weighed on share prices. Then there are high fixed costs that have seen airlines blast through cash reserves. 

The stark fact is that many could be permanently grounded before the year’s out without intervention. Robinhood notes that the industry is expected to lose $314 billion this year in global sales, while Warren Buffett recently dumped 13 million Delta shares

In short, people under lockdown can’t travel and as a result, Delta share price investors are bailing out. But what does this mean for the US’s biggest airline by revenue?

 

 

 

What's happening with Delta's share price?

Delta's share price has crashed over 60% since the start of the year. Most of the losses came at the end of February when the coronavirus-triggered sell-off saw the stock plummet from almost $60 a share to a 52-week low of $19.10.

60%

Delta's share price decline since start of the year

  

What happened in Delta’s Q1 earnings?

Delta took a further beating when Q1 results revealed the extent of the damage.

The airline posted a $607 million pre-tax loss for the first quarter, and at the end of March was burning through $100 million a day. Revenue came in at $8.6 billion, down $1.9 billion and its weakest haul since 2013. Analysts had been expecting $8.87 billion. According to Delta’s chief financial officer Paul Jacobson, cash burn should at least reduce to $50 million by June.  

The airline has already cut capital expenditure by $3 billion. It plans to raise the same amount through bonds and loans to boost liquidity. Other options include selling planes and leasing them back.

$607million

Delta's pre-tax loss in Q1

  

How has the coronavirus hit US airlines?

With the coronavirus making travel redundant, there's simply no demand for Delta's or the wider industry’s services. And the numbers are stark. Flights in the US are averaging 5% to 15% capacity and scheduled flights were down 58% in the second week of April. 

Between 1 to 12 April the TSA screened 110,644 passengers a day, down from the 2.3 million seen the same time last year. So while planes are still flying, there’s not too many people on board.

 

And how has it hit Delta?

Delta itself has grounded 650 planes, axed 85% of its schedule for Q2 and put one-third of its workforce on unpaid leave. A position that it could take years to come back from. 

“The path to recovery is uncertain and likely to be choppy. We believe that it could be up to three years before we see a sustainable recovery,” Ed Bastian, Delta CEO said following Delta’s earnings.

For now, Delta is dependent on the US government’s stimulus package and its ability to secure funds.

“The path to recovery is uncertain and likely to be choppy. We believe that it could be up to three years before we see a sustainable recovery” - Ed Bastian, Delta CEO

 

What is the stimulus package?

US airlines were finally bailed out last week. As part of the US government's stimulus package, 10 airlines will share a $25 billion package to stave off bankruptcy. The deal sees airlines get 70% of the cash in grants - which they don't have to pay back - and 30% in loans. For its part, the US government gets a 1% stake in the airlines. 

Delta’s share of the package was $5.4 billion and it plans to apply for a further $4.6 billion before the end of April.

$5.4billion

Delta's share of the US stimulus package

  

What’s Wall Street’s view?

Simply Wall Street reports that analysts slashed forecasts following Delta’s Q1 earnings. Delta is now expected to post losses of $6.67 per share this year. Before the earnings losses, Wall Street was expecting a loss of $3.68 per share and $27 billion in revenue.

The consensus price target fell 10% to $37.85. While this would see an 68% bump in the share price, the revised target represents a change in sentiment. Still, of the 18 analysts tracking the stock on Yahoo Finance, 11 rate Delta a Buy and 7 rate it a Strong Buy. 

But Delta might be a better bet than its rivals. In a note Helane Becker, an analyst at Cowen & Co said:

“Delta is positioned better than most airlines given their quick actions, access to funds and balance sheet heading into the downturn.”

“Delta is positioned better than most airlines given their quick actions, access to funds and balance sheet heading into the downturny” - Helane Becker, Cowen & Co analyst

 

Is it worth buying Delta?

Given how much it has fallen, Delta’s share price could represent a real bargain right now. Deutsche Bank’s analysts are bullish, arguing that US airlines should make “a significant recovery”. 

But for investors, it looks like a long haul journey before strength returns to Delta’s share price. Right now Delta depends on the stimulus package helping the airlines ride out the storm, and customers being there when things eventually get back to normal.

 

Market Cap$14.134bn
PE ratio (TTM)4.08
EPS (TTM)5.43
Quarterly Revenue Growth (YoY)-18.00%

Delta Air Lines share price vitals, Yahoo Finance, 28 April 2020

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