Perhaps the sector that has taken the biggest hit due to the novel coronavirus is the travel industry, and airlines like Delta Air Lines (NYSE:DAL) stock.
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Even the industry’s bigwigs are struggling to maintain a positive outlook. In an interview conducted on May 12 on NBC, Boeing (NYSE:BA) CEO Dave Calhoun warned that it might take three to five years before the industry recovers to pre-pandemic levels, and at least one major airline could go out of business by the end of this year.
Nevertheless, if there were is one airline that you would bet to bounce back, it would be Delta. The company has an innovator in the industry by revamping its pricing model and investing in foreign companies to provide a cost-effective solution to their domestic needs.
Delta and Southwest Airlines (NYSE:LUV) are the industry’s crème de la crème, outpacing the competition in generating healthy profits and free cash flows consistently. I think that Delta will survive this crisis and come out of this stronger because of its proactive approach towards controlling the situation.
Let’s take a closer look at some of these reasons:
Delta Is Cutting Costs
Every airline company is looking to downsize; Delta is no different. The company is looking to reduce its costs by 50% by the second quarter. The reductions are likely to result in $5 billion in savings, which should be enough to offset the $200 million in unplanned expenses due to the pandemic.
It also scaled back on its capital expenditures by $3 billion and is suspending its stock repurchase program and future dividend payments.
Apart from this, the company announced that it would be parking 650 planes and instituting a company-wide hiring freeze along with voluntary leaves for its employees. Executive management will also be taking it on the chin by accepting significant pay reductions in the upcoming quarters.
To provide further cushion, Delta is receiving $5.4 billion as part of the government’s CARES Act, a $50 billion relief program specifically for the airline sector. It includes $3.8 billion for direct relief and another $1.6 billion low-interest, unsecured 10-year loan. Delta has already received $2.7 billion of funds and expects the rest in the next three months.
Equity dilution due to the stock warrants offered to the governments is negligible, worth 1% of Delta stock at $24.39 per share over five years. Furthermore, the company can also get a hold of an additional $4.6 billion in secured loans, which it hasn’t applied for as yet.
Delta’s management has disclosed a liquidity target of $10 billion for the second quarter, an increase of 66% from the previous quarter. These efforts are likely to reduce the cash burn by at least $50 million by the second quarter, which was at $100 million in the first.
A Focus on the Long Term
With operations at a halt, Delta is making the most of this opportunity to focus its efforts on its long-term plays. The first area that the company is looking at involves fleet simplification, which has been one of its long-term goals for quite some time now.
At its investor day last December, management talked about capitalizing on a massive opportunity to move from a mishmash fleet to one that is simpler and optimized. CEO Ed Bastian talked about this fleet transportation in the first-quarter earnings call, where he said, “Well, certainly anything that was scheduled to retire over the next five years [is on] an accelerated path towards retirement.”
The company will be retiring the last of its 76 MD-88s and MD-90s in early June. Its regional partner SkyWest (NASDAQ:SKYW), announced that Delta would not be renewing its flying contracts for 55 of its CRJ-200s. Additionally, it also plans to retire a few of its older Boeing 757s and 767s.
These optimizations are likely to simplify operations, reduce schedule constraints, limit the frequency of training evens, and reduce fuel and maintenance costs.
Another one of the company’s long-term plays its critical airport infrastructure projects. The executives believe that the pandemic will speed up the construction process due to fewer constraints. With air travel muted for the foreseeable future, and if Delta gets a waiver under the revised slot usage rules, it could reduce its construction costs and streamline project timelines.
The reduced project costs will directly benefit the company in controlling its debt burden. Shorter project timelines will benefit the company through dual taxiways, and the increased gate flexibility will serve mainline and regional jets.
DAL Stock at a Glance
Like all airline stocks, DAL stock witnessed a massive dip in its share price since last year. It shed approximately 67% of its value since December and has been on a predominantly negative streak since then.
Analysts have a relatively neutral earnings rating for the stock considering how to beat its first-quarter EPS beat estimates by 26.7%. Furthermore, they feel that the EPS will worsen in the second quarter to -$4.39 but will recover -$1.76 in the third quarter.
Price targets for the DAL stock suggest shares are trading at a 40% bargain to the current share price of $23. However, the difference between the high and low estimates is $26, which is a testament to the volatility of the stock in these uncertain times.
The Bottom Line on DAL Stock
The coronavirus pandemic pulverized the Delta airlines stock, but it seems to have the best recovery plan compared to its competitors. It has enough liquidity to see off the crisis, and its cost-saving efforts have controlled its cash burn rate.
The company is using this time to aggressively pursue its long-term plays, which will bear fruit in the near future. Therefore, despite the slowdown, DAL stock is still a buy.
As of this writing, Muslim Farooque did not hold a position in any of the securities mentioned above.
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