Delta Air Lines: Eliminating Cash Burn (NYSE:DAL)


In no huge surprise, Delta Air Lines (DAL) beat earnings estimates for the quarter and guided to positive cash flows in the near term, but the management team had to spook the market with negative comments. As TSA traffic continues to rebound, my investment thesis remains very positive on the beaten down airline stock still trading 50% below 2020 highs.

Image Source: Delta Air Lines website

Too Conservative

The airline sector is under unprecedented pressure due to lower demand as the COVID-19 outbreak shut down leisure travel destinations and business travel. Delta beat Q3 EPS targets and the Columbus Day weekend saw the highest level in traffic since the rebound started in mid-April, yet the airline led with a warning on normalized revenues not occurring for over two years from now.

The airline focuses more on business travelers so Delta has seen a slower snapback than other airlines. Delta saw Q3 revenues collapse 79% with passenger revenue down 83% during the quarter while traffic was only down 70%.

For the quarter, the airline reported an adjusted loss of $2.6 billion. A big key, though, is that Delta excluded the $1.3 billion grant from the CARES Act in the loss amount. The U.S. Treasury provided the money to offset higher employee expenses, yet airlines like Delta keep excluding the amounts from adjusted losses and daily cash burn rates.

The problem for Delta is that passengers were around 30% of 2019 levels, but current traffic levels sit at nearly 35% levels. In fact, over the Columbus Day weekend traffic (Thursday through Monday) of 4.6 million was up 500K passengers from the Labor Day weekend just a month ago.

Source: TSA, Stone Fox Capital calculations

The CEO was even bullish on traffic trends with strong demand seen for Thanksgiving and Christmas holidays. As the airlines are able to promote studies on limited virus transmissions on flights, travelers appear more willing to fly, especially when destinations are open.

Cash Burn Under Control

While the market has run with the negative headlines, Delta was actually positive on growing passenger demand even during the tough Winter months. The CEO predicted daily cash burn rates would dip from $18 million in September and $24 million during Q3 to only $10 million during Q4.

The actual statements by CEO Ed Bastian were far more positive than presented by the stock decline:

“While our September quarter results demonstrate the magnitude of the pandemic on our business, we have been encouraged as more customers travel and we are seeing a path of progressive improvement in our revenues, financial results and daily cash burn.”

The CEO even predicted the airline would be cash flow positive during Spring 2021. In essence, the airline is predicting a Q4 cash burn rate of under $1 billion with a clear path to cash flow breakeven within months from the start of 2021. The CEO outlines a picture where one should view the remaining cash burn at ~$1.5 billion until the airline turns cash flow positive. Of course, this all depends on whether the current traffic rebound has any setback.

The airline ended September with $21.6 billion in liquidity which is actually in the form of cash and short-term investments. Since quarter-end, Delta has repaid both the $3.0 billion term loan entered into in March and the $2.6 billion drawn under their revolving credit facilities.

The airline has now taken the dire outcomes off the table. The market will focus on the airline reporting total debt and finance leases at $34.9 billion, up from only $11.1 billion last year. The market will ignore the $21.6 billion in cash on the balance sheet to end September, but this is where alert investors have the opportunity to own a cheap stock.

The stock market can now get back to analyzing the ability of Delta returning to the original EPS targets when the airline started the year. Delta Air Lines earned $7.17 last year and CEO Ed Bastian provided a similar target for 2020 on the Q4 ’19 earnings release:

“As we enter 2020, demand for travel is healthy and our brand preference is growing, positioning Delta to deliver another year of strong results, including earnings per share of $6.75 to $7.75.”

During Q2, Delta spent $221 million in additional interest expenses that would in theory reduce normalized EPS going forward. At the same time, the airline will quickly repay a large portion of the increased debt via cash on the balance sheet while lower operating expenses are possible after the restructuring.

Takeaway

The key investor takeaway is that Delta Air Lines and the airline sector still face a tough flying environment. Passenger traffic is sill down 65% from 2019 levels, but investors can now see a path to ending cash burn, allowing the sector to return to more normalized levels without damaging cash burn. The stock remains a Buy here at $30 with a path to pre-virus earnings in a few years at the latest.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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