Delta Air Lines (NYSE:DAL) stock slid 2.7% after an ugly second-quarter earnings report on Tuesday morning. But the numbers, as bad as they were, likely weren’t the problem for DAL stock.
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After all, every investor knew the results were going to be ugly. They were, with the adjusted loss per share even worse than Wall Street had expected.
But as I wrote before the report, that quarter was to some extent priced in. With DAL stock skidding into the report, it was up to management to tell a story that would lead buyers to step in.
That doesn’t appear to have happened. That’s not a slight against management; there simply isn’t a good story to tell. And that suggests that for Delta and the sector, a rebound may be a long way off.
A Staggering Quarter
To be sure, the numbers were ugly. Adjusted revenue, which excludes sales from Delta’s owned oil refinery, declined an incredible 91% year-over-year. Capacity declined 85% as flights were shut down worldwide during the quarter.
To its credit, Delta did manage to respond relatively quickly to the crisis. Adjusted operating expense (which excludes one-time and non-cash costs) dropped by more than half.
Obviously, that wasn’t enough. Delta lost $4.43 per share (again on an adjusted basis), against a profit of $2.35 the year before.
Again, this isn’t a surprise. Nor are the results necessarily Delta’s fault.
A Reasonable Response
In fact, an investor can look at the quarter and give some credit to Delta management. The company did make a critical misstep coming into 2020. Like its major airline peers, Delta spent lavishly on share repurchases instead of paying down debt.
Still, in a cyclical industry with a history of bankruptcy, Delta should have started preparing for the worst. The economic recovery had lasted a decade at the start of the year, and Delta itself went bankrupt in 2005.
That aside, Delta has moved quickly. It’s slashed spending. Some 17,000 employees have taken early retirement, according to the second quarter conference call. Capacity was slashed, and (again per the earnings call) plans to expand in the second half of the year have been rolled back.
During a literally unprecedented time, Delta management has reacted reasonably quickly and reasonably well. But DAL stock still is down more than half so far in 2020. Perhaps that’s the point.
The Problem with DAL Stock
The broad concern is that there’s not all that much Delta management can do. It can’t cure the coronavirus. It can’t get leisure travelers back on its planes. Nor can it change the new “work from home” tailwind that now adds further pressure.
After all, the worries for DAL stock aren’t just a matter of Q2 numbers. The losses this year — Delta still burned $27 million in cash in June — are material. But the mid- to even long-term outlooks aren’t great, either.
Bear in mind that business travel is a big moneymaker for airlines. Business travelers are often less price-sensitive, and more likely to pay up for premium seating and/or other amenities.
In a world where Zoom Video Communications (NASDAQ:ZM) is adding tens of millions of users, and the likes of Facebook (NASDAQ:FB) and Shopify (NYSE:SHOP) are instituting permanent remote work policies, business travel simply may not be as important. Clients will be contacted, and even deals done, over video conference.
Add near-term losses, mid-term pressure, and significant debt ($14 billion at the end of Q2, even adjusted), and the decline in DAL stock isn’t a buying opportunity. It’s logical.
Nothing to Do
Investors seem to be figuring that out. That’s why shares of Delta have retreated. Other airline stocks have done the same: the U.S. Global Jets ETF (NYSEARCA:JETS) has pulled back at roughly the same pace as Delta stock over the past five-plus weeks.
And that in turn left Delta management in an impossible position on Tuesday. The ugly numbers were out of its control. There wasn’t a story to tell that was going to inspire confidence. Breakeven cash flow in the second half of the year isn’t bad, but chief executive officer Ed Bastian told investors it would take “more than two years” for a “sustainable recovery” to arrive.
That’s not the story investors want to hear. But it’s the only story Delta has to tell. Until that changes, DAL stock likely isn’t going anywhere.
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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