- Delta Air Lines is far too conservative with guidance.
达美航空公司(Delta Air Lines)在指导方面过于保守。
- The airline should easily top recent Q3 revenue guidance of 25% of 2019 levels.该航空公司第三季度的收入预期将轻松超过2019年水平的25%。
- Delta is headed to cash flow break-even quicker than corporate guidance, leaving the company with too much liquidity at year end.
- The stock is too cheap trading below 10x current '21 EPS estimates with a likely return to pre-virus EPS targets above $7 sooner than later.
During this period of passenger traffic recovery, the airlines and in particular Delta Air Lines (DAL) have been one of the biggest detractors. While under-promising and over-delivering in normal times is a prudent management decision, such a move isn't as wise in the middle of a virus crisis and investor panic. My investment thesis remains bullish due to this airline and others providing too conservative of a guidance allowing for plenty of upside in the business and the related stocks.
Coming out of the crisis traffic lows in mid-April, the airlines famously provided guidance for Q2 daily cash burn rates based on zero-revenue environments and without factoring in the Payroll Support Program grants from the U.S. Treasury. The airlines could've easily provided guidance based on a ramp to 10%, 25% or even 50% revenue levels while factoring in the PSP funds to accurately reflect daily cash burn targets.
Now three months later, Delta Air Lines CEO is back up to the old tricks. Last week, CEO Ed Bastian proclaimed that summer revenues would only reach 25% of 2019 levels only three days prior to TSA traffic already topping 25%:
“While it's encouraging to see flights returning, we expect our overall demand this summer to be only 25 percent of last summer's revenue, and we likely remain at least two years away from a return to normal.”
Only a few days later, competitor United Airlines (UAL) discussed plans to add 25,000 flights in August alone. The airline plans a domestic schedule at nearly half the August 2019 levels with total capacity at 40% of 2019 levels due to far lower international flights. The company sees a boost in demand from 30% in July to the 40% levels in August.
This brings us back to Delta only forecasting 25% revenue levels here with United boosting capacity to 40% levels. When considering loyalty mileage revenues offset by lower ticket revenues, one has to take into account the revenue nearly matching capacity levels and why analysts have Q3 revenue estimates at 32% of 2019 levels.
As mentioned above, air traffic is already up to 25% of 2019 levels before even starting Q3. Certain states are issuing quarantine requirements from key travel destinations such as Florida, but the guess is that these moves only reduce travel demand at the margin. Travelers better understand the virus now, making them less likely to cut a week's vacation to Florida just because of a requirement to quarantine (one that isn't even really enforceable) when daily deaths are at recovery lows despite surging new cases.
Even worse maybe, Delta keeps discussing the path to normal taking at least two years. The biggest question is what an airline executive means by "return to normal".
A big difference exists between a return to 80% of 2019 traffic levels where the airlines can be cash flow positive on reduced costs or a 100% return to last year's levels. Even American Airlines Group (AAL) discussed a new normal in 2021 where international flights are still down 25% from peak levels. This new normal sounds more positive and far less dire than the two years for a return to normal from the CEO at Delta.
2019年客流量恢复到80%水平，航空公司可以因为降低成本而实现正现金流，而航空公司的客流量恢复到去年的100%水平，两者之间存在很大的区别。就连美国航空集团(American Airlines Group, AAL)也讨论了国际航班在2021年仍将较峰值水平下降25%的新常态。这一新常态听起来比达美航空(Delta)首席执行官两年来的恢复常态更为积极，也远没有那么可怕。
Evaporating Cash Burn
While Delta continues to predict some dire outcomes every time the company talks to the media, the airline has nearly wiped out the daily cash burn rate already. The airline ended June only burning $30 million per day despite not originally forecasting much in revenue growth for the period where cash burn was cut from $100 million per day.
A jump from 20% of 2019 revenue levels in June to 40% in August would add nearly $630 million in additional monthly revenues. The amount equates to ~$21 million per day in added revenues.
The airline is adding more flights, so variable costs such as jet fuel and maintenance will rise, but the airline is already paying for the employees to cover these additional flights. The big question is how to close the gap between the PSP funds and the excess payroll costs above 40% capacity levels.
Again, Delta's management was far too conservative when providing liquidity guidance for the year at the annual meeting. While the airline projected having over $15 billion in liquidity by the end of Q2, management only targets $10 billion of liquidity at year end. The caveat of break-even cash burn by year end can't occur while burning $5 billion in liquidity for the rest of the year.
This dip would require Delta to burn $28 million per day for the rest of the year, which again is the management team predicting a dire outcome unlikely to occur. For the airline to reach cash break-even by the end of the year, Delta would only burn close to $2.5 billion in cash during the period for an average of $15 million per day. The airline is much more likely to end the year with $12.5 billion in liquidity.
The stock has taken a hit since the early June peaks due to concerns of a second wave of COVID-19 along with new case spikes in travel destinations such as Florida, Texas and Arizona. A major key to whether the airline stocks rally off the June lows is whether deaths related to the virus jump. New cases took off in early June, yet deaths are at the lows since March due to the lack of new infections in the elderly. Without a jump in daily deaths, Delta Air Lines is likely to easily rally to the June highs of $37 and higher.
The key investor takeaway is that the stock below $30 looks ready for a run here. The market will increasingly realize the management team is far too conservative when the company provides financial estimates.
Delta Air Lines was a cheap stock at pre-virus highs above $60 and investors should eventually expect a return to those levels as the COVID-19 worst-case outcome is eliminated, and the biggest discussion is the level of rebound in 2021 and beyond. For now, Delta appears set to retest the recovery highs as daily cash burn rates are cut to zero and the airline ends up with far too much liquidity sparking a rally.
达美航空(Delta Air Lines)股价在病毒爆发前的高点60美元以上，是一只便宜的股票。随着COVID-19最坏情况的结局被消除，投资者最终应该会期待股价回归到这一水平，而最大的讨论是2021年及以后的反弹水平。就目前而言，达美航空似乎将再度测试反弹高位，因日现金消耗率降至零，且该航空公司最终将因流动性过多而引发反弹。
The stock trades below 10x current '21 EPS estimates with a likely return to pre-virus EPS targets above $7 sooner than later.
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Disclosure: I am/we are long AAL, UAL. 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.