What Is Bad for Delta Is Worse for Other Airlines

What Is Bad for Delta Is Worse for Other Airlines

Delta's disappointing third-quarter results are a warning of what is to come, but could also be a buying opportunity

Delta Air Lines's survival seems secure for now, given a $22 billion liquidity buffer. afp
Delta Air Lines's survival seems secure for now, given a $22 billion liquidity buffer. afp

Unlike most companies, airlines seem set to disappoint investors this earnings season. It could offer a window of opportunity to pick out the best among them, though.

On Tuesday, Delta Air Lines reported a $5.4 billion loss for the third quarter, compared with a profit of $1.5 billion a year earlier.

Excluding restructuring costs due to the pandemic, earnings per share were a negative $3.30 before taxes, 9% worse than Wall Street analysts were forecasting. A positive surprise in cargo revenues wasn't enough to offset a 83% drop in sales to passengers, which were expected to top $2.3 billion and instead came in at $1.9 billion.

The company's survival seems secure for now, given a $22 billion liquidity buffer. The daily cash burn, however, was still $18 million by the end of September.

Chief Executive Ed Bastian said Delta won't stop draining cash before the spring of 2021, later than his earlier year-end target.

Shares in Delta, the first major U.S. airline to report third-quarter earnings, fell about 3% and dragged down their peers. United Airlines and American Airlines, the other two big legacy carriers, were down around 2% and 4%, respectively.

Airline stocks have whipsawed in recent weeks as traders speculate on the likelihood of lawmakers approving a second industry bailout package. Some investors also are hoping that rapid testing at airports will allow international travel to return even before a Covid-19 vaccine is found.

U.S. airport throughput has hit a six-month high.

Delta President Glen Hauenstein pointed Tuesday to positive booking trends ahead of Thanksgiving and Christmas.

But good news may already be in the price: Airline stocks have risen 15% in the past three months. And there has been plenty of bad news too.

Investors need to start processing that the airline recovery will take longer than they thought.

The resurgence of coronavirus cases in the U.S. and around the world has foiled most optimistic forecasts, especially for international travel.

Delta's planes were only 41% full in the third quarter, the company said Tuesday, significantly below the consensus 49% estimate. A rebound in business travelers, who contribute most of legacy airlines' profit, will take at least two years, Delta now expects.

The industry's ups and downs may be masking some of the Atlanta-based airline's core strengths.

Revenue from its valuable loyalty program, which served as collateral to borrow as much as $9 billion in September, was down only 60% in the quarter.

Delta also said that spending on its co-branded credit cards is holding up better than on other American Express cards.

Greater profitability than American or United coming into this crisis has allowed Delta to slash costs while so far avoiding job cuts, and to concentrate on strengthening its key hubs rather than chasing low-value sun-seekers. Passenger yields were only down 2% in the third quarter.

Longsighted investors should consider a bet on the U.S's best-in-class legacy carrier. Those expecting the winter to be kinder to airlines should think again.

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