Expect More Turbulence Ahead for Delta Air Lines Stock

Friday, October 9, 2020 | MarketBeat Staff
Expect More Turbulence Ahead for Delta Air Lines Stock

Investor interest in the airline space has been flying high since the pandemic. The crippling effects on the travel industry have led to depressed valuations and tempted bargain hunters to buy airline stocks.

Delta Air Lines (NYSE:DAL) has been among the companies that have been most actively traded. Yet despite the buzz, the stock price has remained mostly grounded in recent months.

With the Trump administration pledging monetary relief for the ailing airline industry, can Delta finally begin its ascent?

It's anyone's guess if relief will soon come Delta's way. What's more certain is that the stock will continue to be volatile for the foreseeable future. Muted demand for leisure and business travel and higher expenses related to COVID-19 will make it very difficult for Delta and its peers to lift off anytime soon. 

What are the Headwinds for Delta?

Simply put, lower demand is the big problem for Delta and the nation's other major air carriers. State travel restrictions and a general sense of unease about getting on board a giant metal petri dish has made Delta scrambling for ways to lure back travelers.

Instead of the usual hectic holiday travel season, Delta's terminals will be virtual ghost towns as people stay home or hop in their cars to spend time with family this winter.

Corporate travel has also ground to a halt. Businesses have shifted to remote work arrangements and are conducting business through technology rather than travel. Corporate travel demand has also not shown signs of a turnaround.

Delta's dependence on passenger revenue makes it especially susceptible to the current travel market conditions. Approximately 90% of revenues were generated from passenger travel last year while less than 2% came from cargo transportation.

These challenges have forced Delta to make liquidity preservation a priority. The company's main financial goal is to reduce average daily cash burn to zero and secure $10 billion in liquidity by the end of this year. With or without government aid, Delta will likely meet these targets as the capital markets have been supportive.

In addition to pausing new aircraft deliveries, Delta is idling and retiring a significant portion of its fleet. Non-essential maintenance has been reduced. These measures should go a long way in paring down labor and other expenses. And of course, lower fuel expenses help, although at this point Delta would gladly trade higher fuel prices for increased booking trends.

What Can Propel Delta's Stock Higher?

The road to recovery will likely be a long and choppy one for Delta. The company has estimated that revenue recovery to pre-COVID levels could take as much as two to three years. Until then Delta must be resigned to becoming a leaner carrier with limited flight options and a slimmed-down employee count.

And while the passage of the proposed $25 billion aid package for airliners would help boost investor sentiment towards Delta's stock, it will be a band-aid to keep the company solvent. Ultimately for Delta's share price to go on a sustainable rally, people will have to want to return to the friendly skies.

This means corporate travel policies will have to loosen. With many companies investing heavily in remote workforce technology, some businesses may never return to Delta and others will do so only in urgent cases.

Leisure travelers will also need to become more comfortable with air travel. Although Delta has noted modestly improved travel demand in recent months, people remain cautious.

Air travel and public transportation just aren't desirable ways to get around these days. Its no wonder that used car and truck prices increased more than they have in 51 years in August.

Even as pandemic conditions improve, air travel as we know it will probably never be the same. People who previously didn't think twice about booking a flight, will be more likely to consider alternative transportation modes due to the perceived relative safety.

Efforts by air carriers to disinfect and clean their aircraft and waiting areas haven't been enough to win back fliers. Nor has removing the already undesirable middle seat as passengers have decided the battle against the virus is more important than the battle for elbow room.

To help people feel safe, some airports and airlines taken steps to ease travelers' minds once they reach the airport. They are offering COVID-19 testing as a way for travelers to avoid the 14-day quarantine restrictions imposed by some states—and more importantly to help people feel better about hopping on board.

These efforts all come with good intentions, but the airline industry has many miles to go before consumer comfort catches up with travel demand.

Is Delta Air Lines Stock a Buy?

In terms of valuation, Delta's share price looks cheap at 0.4x sales—but with good reason. Plenty of hurdles stand in the way for the company to return to growth.

We'll learn more about the Delta's latest financial performance (and efforts to survive) when the company reports third quarter earnings pre-market on October 13th. Analysts are expecting a narrower net loss compared to last quarter of $3.10 per share.

In the meantime, investors should expect the bumpy ride to continue well into 2021. If we start to see signs of smoother air ahead in the form of healthy, sustainable travel demand then the stock could be a buy. Until then, it's merely a speculative play on the day-to-day pandemic and stimulus headlines.

So, while the misfortunes of the airline industry have attracted many traders, long-term investors should remain on standby until industry fundamentals improve before boarding Delta.

Featured Article: Why Invest in High-Yield Dividend Stocks?

7 Hotel Stocks Just Waiting For the Vaccine

Like any group of stocks related to travel and tourism, hotel stocks saw a steep drop in share prices in 2020. The leisure and hospitality sector that once had 15 million employees has lost 4 million jobs since February.

Many major cities will be feeling the ripple effects of the Covid-19 pandemic for years. However, there is ample evidence that shows the pandemic may be coming to an end. The number of new cases is dropping. The number of those getting vaccinated is rising. And even in the cities with the most restrictive mitigation measures, the slow process of reopening is beginning.

All of this can’t come fast enough for individuals who rely on the travel and tourism industry for their livelihood. Hotel chains had at least some revenue coming in the door. And when earnings season concludes, the more budget-friendly hotel chains may realize revenue that is 75% of its 2019 numbers. But that is not enough to bring the hotels to anywhere near full employment. Particularly with hotels that have bars and restaurants that have remained closed or open at limited capacity.

Many economists are optimistic that travel may begin to look more normal by the summer of this year. And the global economy may deliver 6.4% GDP growth this year. With that in mind, the hotel chains with the best fundamentals and the broadest footprint will be in the best position as the economy reopens.

View the "7 Hotel Stocks Just Waiting For the Vaccine".

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Delta Air Lines (DAL)1.4$44.60-1.3%N/A-2.29Hold$47.84
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