Delta Air Lines Inc. (NYSE: DAL) amid the increasing fallout from the coronavirus pandemic. Demand for air travel has plunged and management expects the company’s cash burn to continue in the current fourth quarter and the first quarter of 2021. On the cost side, Delta must still maintain, repair and store its aircraft, and its workforce is highly unionized. As such, we project a significant loss in 2020.
We expect these efforts to help offset the impact of rising labor costs (which totaled nearly $2.0 billion in 3Q20), and look for continued returns of capital to shareholders; however, we caution that airline stocks are volatile and suitable only for risk-tolerant investors.
The consensus loss forecast was $3.08 per share. The wider-than-expected loss reflected a 76% drop in revenue and an occupancy rate of 41%, down from 88% in the prior-year period.
Third-quarter revenue of $3.06 billion missed the consensus estimate of $3.10 billon. The company said the effect of the pandemic was much worse than it had anticipated. The operating loss was $2.6 billion, down from operating earnings of $2.0 billion in 3Q19. However, management was able to cut 3Q adjusted operating expenses by 52%.
The company now expects a cash burn of $10-$12 million in the fourth quarter. It has also pushed back its estimate of zero cash burn to 2Q21 from the end of 2020.
Earnings rose 30% to $7.31 per share. During the year, Delta spent $3 billion on share repurchases and dividend increases.
EARNINGS & GROWTH ANALYSIS
Given very weak flight demand, Delta is cutting costs to lower its cash burn. We note that Delta’s cost cuts include reduced salaries, despite union contracts that limit reductions and furloughs. In addition, about a sixth of the company’s more than 90,000 employees have applied for retirement.
Assuming that the cash burn declines, we expect it to end 2020 with liquidity of $20 billion.
FINANCIAL STRENGTH & DIVIDEND
Standard & Poor’s rates Delta’s credit as BBB-, an investment-grade rating. Fitch has a rating of BBB-/stable, also investment grade. Moody’s rates the debt as Baa3/stable. Long-term debt and capital leases came to nearly $35 billion, or 91% of total capital, up from 36.7%.
MANAGEMENT & RISKS
Richard H. Anderson, who had served as Delta’s CEO since September 2007, retired on May 2, 2016 and is now executive chairman. Mr. Anderson had used unusual strategies, including an employee profit-sharing plan and the purchase of an oil refinery, to improve the company’s performance. He has been succeeded by President Ed Bastian, who joined the company in 1998.
Delta Air Lines is part of the SkyTeam global alliance and takes part in trans-Atlantic joint ventures with Air France-KLM, Alitalia and Virgin Atlantic. The company’s hubs include Amsterdam, Atlanta, Boston, Detroit, Los Angeles, Minneapolis/St. Paul, New York-JFK, New York-LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Seattle, and Tokyo-Narita.
Given ongoing industry challenges from the coronavirus pandemic and prospects for only a partial recovery late in 2021, we use our 2022 EPS estimate to value the shares. We believe that DAL shares are fairly valued at 11.5-times our 2022 EPS estimate (which we discount back one year), in the upper half of the five-year historical range of 4.4-15.2 but below the peer average. The price/sales ratio of 0.6 is near the middle of the five-year range of 0.2-1.1 and just below the peer average. If the pandemic is contained sooner than we expect, we would consider returning the stock to our BUY list.