No company could be more vulnerable to coronavirus than Delta Airlines (NYSE: DAL).
Notably, Delta’s share price fell from $47.16 on 2 March 2020 to $23.08 on 6 April 2020. Frighteningly, Delta’s share price plunged as low as $21.35 on 20 March 2020 before a modest recovery.
Coronavirus threatens Delta’s existence because of stay-at-home orders, closed borders, social distancing, and quarantine threats. Dozens of countries have closed their borders and implemented travel bans.
Countries that have closed their borders includ; Canada, Chile, the United States, China, India, Japan, Malaysia, Philippines, Australia, New Zealand, Israel, most of the European Union, Russia, Switzerland, and Turkey, The New York Times reports. In addition, many countries have banned or restricted foreign flights. Furthermore, U.S. President Donald J. Trump (R-Florida) explored the possibility of a coronavirus quarantine in New York State, the BBC reports.
How Coronavirus can Kill Delta Airlines
Travel restrictions threaten Delta (NYSE: DAL) because it offers hundreds of flights to over 300 destinations in 60 countries.
Notably, Delta is grounding over 300 planes; around 30% of its 910-plane fleet, Flight Global estimates. Moreover, Delta plans to cut 40% of its capacity, or 40% of its moneymaking capacity in coming months. In particular, Delta plans to end all flights to mainland Europe.
To save money Delta will defer aircraft deliveries, cut discretionary spending, and offer voluntary unpaid leave to employees, CEO Ed Bastian announced on 13 March 2020. Consequently, Delta could find itself with no way to make money because of coronavirus.
How Much Money Does Delta Have?
Sadly, Delta was doing well before the Covid-19 pandemic struck. In fact, Delta reported quarterly revenues of $11.439 billion on 31 December 2019.
Additionally, Delta achieved a gross profit of $4.148 billion and an operating income of $4.148 billion for the last quarter of 2019. That gave Delta a net income of $4.767 billion, an operating cash flow of $957 million, and an ending cash flow of $1.032 billion for the last three months of 2019. Notably, Delta reported a financing cash flow of $842 million for the same period.
Finally, Delta had $2.882 billion in cash and short-term investments and total assets of $64.532 billion on 31 December 2020. Hence, I think Delta was a good stock with strong growth potential last year. Interestingly, Delta reported a 6.49% revenue growth rate on 31 December 2019.
Is Delta Airlines a Value Bargain Investment?
One Delta true believer is Warren Buffett. Berkshire Hathaway (NYSE: BRK.A) owned 11% of the outstanding DAL shares at the end of 2019, Guru Focus estimates. In detail, Berkshire Hathaway (NYSE: BRK.B) owned 70,910.456 shares of Delta on 31 December 2019.
Given this data, I have to wonder if Berkshire Hathaway will take advantage of the pandemic to buy more Delta, or all of Delta. The media is speculating that Buffett is on the lookout for a major purchase. I think Delta could be that purchase.
Notably, Macrotrends estimated Delta’s Market Capitalization at $14.52 billion on 2 April 2020. Meanwhile, Barron’s claims Berkshire Hathaway had $125 billion in cash and equivalents at the end of 2019.
I think Buffett’s interest shows Delta has value potential and DAL is cheap now. However, I conclude Delta Airlines has no margin of safety because of the coronavirus.
What Value Does Delta Have?
Theoretically, Delta has a lot of potential value because of its 910 plane fleet and expertise in aviation. However, that value is contingent on a few possibilities including:
First, the coronavirus pandemic will have to end quickly. Epidemiologists think the pandemic will end 81% of the population develops “herd immunity” to COVID-19, Science News claims. The population could take up to three months to achieve herd immunity.
Additionally, it will take different amounts of time for herd immunity to develop in different areas of the world. Given that data, I think it will take six to eight months for normal travel to resume at the earliest. Hence, Delta will have to keep most of its fleet grounded for up nine months.
Delta has no Margin of Safety
Second, governments allow normal air travel to resume fast. Personally, I cannot see a major political leader anywhere risking the resumption of normal travel.
My guess is the fear generated by a return to normal chance whatever chance of reelection President Donald J. Trump (R-Florida) has. Thus, I cannot see Trump allowing normal travel for at least a year.
Third, Coronavirus will have to end fast. Given the epidemiologists’ calculations, I do not consider an early end to coronavirus, or the fears it generates, probable.
Fourth, public fears of coronavirus will have to completely subside for normal travel to resume. My prediction is fears will grow to ridiculous proportions instead of subsiding. Remember, journalists, bureaucrats, politicians, and other pests can make a lot of money and increase their power by inflating coronavirus fears.
Fifth, there will be no other pandemics. This possibility is less probable because I think the media will exaggerate any future disease outbreak out of proportion. Politicians, journalists, and others will make the situation worse by stoking pandemic fears.
Under these circumstances I do not foresee air travel returning to current levels for three to four years at the earliest. Thus, Delta could lose money for several years.
Delta is doomed by the Coronavirus
In the final analysis, Delta could be doomed by the coronavirus. I would not be surprised if Delta shares fell below $10 soon and the airline will be forced to sell itself, possibly to Berkshire Hathaway.
Berkshire could buy Delta because its planes could have value as cargo haulers for e-commerce giants such as Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT). Business is booming at both Amazon and Walmart because many are afraid to go shopping. Notably, Amazon plans to hire 100,000 workers to meet Coronavirus, The Verge reports.
However, it will cost a lot of money to convert passenger planes to cargo haulers. Thus, I think Delta will have to be cheap; probably under $10 a share, for Berkshire Hathaway to buy it.
Moreover, I cannot see how Delta (NYSE: DAL) can continue paying the 40.25₵ dividend it offered on 19 February 2020. I predict Delta’s dividend will end.
Thus, I advise investors to stay away from Delta for the foreseeable future. I believe Delta is doomed and will make no money for anybody, except possibly Berkshire Hathaway.
Originally published at https://marketmadhouse.com on April 3, 2020.
