Second quarter earnings from Delta Air Lines (NYSE:DAL) are going to be ugly. There’s no two ways about it. But the good news for DAL stock is that soft numbers are not going to surprise anyone. Unfortunately, that’s also the bad news.
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Delta’s stock is stumbling into earnings, having lost over a quarter of its value in the last five weeks. The selling pressure for the most part is coming from external factors, particularly a surging number of novel coronavirus cases in the U.S. It would be a potential help to the stock if Delta could somehow outperform expectations.
That’s not going to be happen. To be sure, Delta’s numbers could come in ahead of Wall Street consensus. But that consensus suggests an unprecedented 89% decline in revenue year-over-year, and a net loss over $4 per share.
“Beating” the Street simply means the quarter wasn’t quite as horrible as thought. Given the external environment, that’s probably not enough to drive DAL stock up all that much, let alone toward last month’s highs.
And so the only thing that is going to move the stock in trading Tuesday is management. Specifically, Delta needs to convince investors that it’s going to be able to manage the worst of the current crisis, while also establishing hopes for success once some semblance of normalcy returns.
It seems like a big ask, and as a result I’d expect trading in DAL to be rather muted on Tuesday. But if the stock is going to find a bottom, it’s the company’s management that will need to do the heavy lifting.
The Concerns Facing Delta
There are two core concerns when it comes to shares of Delta and other airlines. The first is the amount of money being lost in 2020, and the extent to which U.S. airlines can manage those losses. The second is what the industry looks like once some semblance of normalcy returns.
The losses this year will be significant. Wall Street expects Delta to report a loss of over $4 billion this year. Cash burn may be even more significant, given Delta’s response. The company raised $5.4 billion in new capital in the first quarter and drew down another $3 billion on its revolving credit facility. Last week, Delta signed a letter of intent for more loans from the federal government under the CARES Act.
Those moves at least take a near-term bankruptcy off the table, a key reason why DAL stock has rallied off May lows. But they don’t answer the longer-term questions.
After all, the recent moves suggest that Delta is not going to be nearly as profitable going forward, even in a more normalized environment. Capacity has been cut by as much as 70%. Interest expense on the added debt will be significant.
And as I noted in expressing some caution toward the U.S. Global Jets ETF (NYSEARCA:JETS), this is a business with enormous operating leverage. Incremental passengers drive a huge amount of profit. That’s part of why Delta’s earnings have swung so dramatically in recent quarters.
It’s true that Delta stock is much cheaper. So are the likes of United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL). But considering near-term losses, higher debt and lower profits for several years, the declines in the sector make some sense.
How Management Can Rescue DAL Stock
The myriad challenges here are why I’m skeptical toward the sector. And it’s why I don’t expect much from Tuesday’s earnings report.
Simply put, there’s just not all that much Delta can say. We know it’s going to be a long hard slog for the industry. Delta’s own chief executive officer said in April that it would take “two to three years” for the industry to recover.
That may be optimistic. The recovery following the attacks of Sept. 11 took longer, and Delta actually didn’t make it: the company filed for bankruptcy in 2005. (That’s one reason why my pick in the sector, if forced to choose, would be Southwest Airlines (NYSE:LUV). Southwest remains the only major carrier to have avoided bankruptcy.)
Still, it’s possible management can do something on Tuesday to change investor minds. A coherent, detailed plan for the recovery would help. Detailed discussion around capacity and the labor force might also drive optimism. It’s possible that news of any kind might calm investors, who would prefer some sort of outlook to the uncertainty of the moment.
Again, I’m skeptical. But if I’m wrong, it’s going to be because management was able to change the story — not because the actual numbers are any kind of surprise.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.
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