Huge Cash Burn And Stock Down 55%: Can Delta Recover?

by Trefis Team
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Delta Airlines’ (NYSE:DAL) operations are at a standstill as the Covid-19 pandemic continues its course. The company’s stock has taken a massive beating, falling nearly 55% this year (as of June 24). Facing nearly $100 million a day burn at its peak, its Q1 2020 revenue dropped 18%. But the real impact will come in Q2 2020 when the revenue is expected to plummet by a gigantic 90% y-o-y. There is not much the airlines can do as customers stay locked in homes to avoid the coronavirus. The question is: can Delta’s stock recover from here? It is all about demand recovery and how risk assessment of investors changes from here. We consider two demand recovery scenarios and assess how well prepared Delta is from a liquidity stand point to survive in these scenarios. We find that in a pessimistic case, Delta will post a huge annual loss of about 4 billion, and cash outflow of nearly $1.7 billion even if it cuts its capital expenditures by 70% and doesn’t spend any money on share repurchases or dividends. Luckily, it does have the cash cushion to absorb this outflow. Our dashboard Does Delta Airlines Have Enough Liquidity To Survive Covid-19 Demand Shock examines the company’s cash flow generation ability and financing requirements in two different demand recovery scenarios. 

How Is Delta Looking If Demand Starts Recovering In Q3 and Bounces Back By Q4?

Consider a scenario where the demand shock experienced by the travel industry completely fades away by the fourth quarter of this year, and Delta starts running most of its routes. In this scenario, we assume a revenue decline of 30%, and a 50% cut in capital expenditures in 2020. We also assume that Delta will not repurchase any shares. While the net loss could be north of $-400 million on a revenue base of close to $33 billion, Delta can still generate $750 million in free cash flow before dividend distribution to shareholders if it can cut its capital expenditure in half to $2.5 billion. That’s not too bad for a company that’s among the hardest hit by the pandemic.

But What If This Recovery Is Incomplete As Non Essential Travel & Discretionary Spending Remain Low? 

Here is a more worrying scenario. Even if there is complete control over the pandemic by Q4 that allows airlines to operate, there is a good chance that consumers will pull back their discretionary spending and avoid non-essential travel. The businesses are also undergoing a significant shift in how they collaborate and operate, and some of those structural changes are likely to persist and impact business travel as well. In this scenario, we assume 50% decline in revenue and calculate that Delta will require additional financing of nearly $1.7 billion if it were to stay afloat, given its cost structure, even after cutting its capital expenditure by 70% to mere $1.5 billion. Delta’s high fixed cost structure makes it vulnerable to demand fluctuations. The good news is that Delta’s current cash cushion can absorb this cash outflow. At the end of March 2020, the company’s cash and cash equivalents stood at around $6 billion.

The entire airline industry is facing the heat. The difference lies in the amount of cash infusion needed to keep the business afloat until demand resumes, and their current cash positions. While Delta is is looking at $1.7 billion outflow in a pessimistic case, American Airlines may be looking at burn of $4 billion. While investors are certainly staying away from Airline stocks right now, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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