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Speculate On Delta Air Lines After Bankruptcy Risks Fade

Chris Lau
·3 min read

Despite the pandemic due to the coronavirus raging on in the U.S. and worldwide, Delta Air Lines (NYSE:DAL) is trading in a tight range. The cautious investor would avoid DAL stock on its heavy debt load alone. Even if the pandemic were too slow, people are unlikely to book a flight.

a Delta (DAL) plane flying through the clouds
a Delta (DAL) plane flying through the clouds

Source: NextNewMedia / Shutterstock.com

When the pandemic started earlier this year, businesses banned meeting-related flights. Instead, they paid for a subscription on Zoom Video (NASDAQ:ZM). So, if airline traffic volumes are slow in growing, why invest in Delta Airlines?

Catalysts For DAL Stock

Late last month, Delta and the pilot union reached a deal to avoid furloughs. The delayed cost cuts will prevent job losses until Jan. 1, 2022. This prevents any disruptions in its operations for over a year. Delta is in a good position to benefit from an airline demand rebound if it ever comes. In the last few weeks, total traveler throughput stayed relatively consistent at around 900,000. Total traveler throughput stayed in the 2.5 million range, according to Transportation Security Administration.

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The Centers for Disease Control’s decision to let its no-sail order expire if cruise companies prove they have a Covid protocol is another positive catalyst for airlines. Restarting cruises will increase the demand for flights. Restarting cruises is not a sure thing. The industry needs a protocol that will test passengers for the coronavirus. It must first run the testing through trial runs. And cruise lines need land-side medical facilities to treat potentially infected passengers.

The cruise line industry has a challenge ahead in convincing the CDC to lift the ban. Most of its customers are the elderly. If they have pre-existing health conditions, they are at most risk from the coronavirus.

Near-term Risks

The U.S. daily record for coronavirus cases is bad news for the airline industry. In the third quarter, when the infection rate was not so high, Delta posted a loss of $8.47 a share or a loss of $6.9 billion. Total revenue was $3.1 billion. The adjusted revenue of $2.6 billion is 79% lower than last year. The airline spent $4 billion in the period, due mostly to Covid-related items. This included fleet-related restructuring charges, voluntary separation charges, and the cost of its early retirement program for employees.

The airline offset some of its losses with a $1.3 billion CARES Act benefit.

Delta ended Q3 with a strong liquidity position of $21.6 billion. Total debt, which includes finance lease obligations, was $34.9 billion. The September debt raise of $9.0 billion, a record level in aviation history, removes any risks of bankruptcy.

Opportunity

Delta is unlikely to increase its revenue to offset the $9.5 billion in operating expenses. It may only wait out the pandemic for the next few months. As the flu season begins, passenger traffic volumes may stagnate. The best-case scenario for Delta shareholders is a decline in quarterly losses.

Delta transformed the industry standard of clean and increased space among customers on flights. So, if the airline posts a scientific report that suggests the virus spread is minimal to none on flights, customers may feel at ease. Still, movie theatres like AMC Entertainment (NYSE:AMC) implemented AMC Safe & Clean at its locations. That failed to lift movie attendance. AMC still posted revenue falling 90.9% to $119.5 million.

Speculators have a better bet with Delta stock than with AMC. AMC is running out of money whereas Delta recently raised cash to avoid bankruptcy risks. Delta and all the airline stocks are not for investors in need of safety. The sector may not recover for a while. As long as Delta is the stronger airline, it has the best chance of eventually bouncing back.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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