Delta Reports Earnings Tomorrow. The Focus Will Be on Cash Burn. -- Barrons.com
DOW JONES & COMPANY, INC. 11:50 AM ET 10/12/2020
Symbol Last Price Change | DAL | 32.54 | -0.27 (-0.8229%) | | UAL | 36.4736 | -0.6464 (-1.7414%) | | AAL | 12.995 | -0.205 (-1.553%) | | QUOTES AS OF 11:50:47 AM ET 10/12/2020 |
Delta Air Lines (DAL) kicks off third-quarter earnings season for airlines on Tuesday. Investors are expecting steep losses, but the stocks are likely to move on airlines' updates of their cash burn and outlook for a recovery in demand.
Across the Atlantic, meanwhile, the CEO of British Airways, Alex Cruz, has departed amid a shake-up at parent company International Consolidated Airlines Group . IAG has been burning through cash, like other global airlines, and its top ranks are going through a reorganization after longtime CEO Willie Walsh retired in September.
Delta (DAL) is expected to report a pretax loss of $2.4 billion in the third quarter. Sales are forecast to be $3.1 billion, down 75% from a year earlier, with passenger revenue off by 79%. Consensus estimates are for the carrier to report an adjusted loss of $3 a share.
United Airlines Holdings (UAL) is also scheduled to report results this week -- issuing its third-quarter report on Wednesday after the market closes. The carrier is expected to report sales down 78% to $2.5 billion and pretax losses of $2.7 billion. United's adjusted loss is forecast to be $7.44 a share, according to consensus estimates.
Several Wall Street analysts still have Buy ratings on Delta, arguing the company has done a relatively good job of managing its cost structure.
The catalysts for the stocks are likely to be airlines' updates on their cash-burn rates and outlook for demand. Both Delta and United have lined up plenty of financing to maintain operations at sharply reduced sales levels, but their cash-burn rates will be a sign of how well they are managing to reduce their cost structures to match lower revenue -- taking the hard steps of reducing capacity and cutting payroll expense.
The stocks are also likely to be whipsawed by news of another bailout package from Washington. The industry has started furloughing thousands of workers, after payroll support under the Cares Act lapsed, and carriers are holding out hope for another $25 billion to help cover payrolls for an additional six months.
Congressional leaders and President Donald Trump support more aid for the industry, but a stand-alone package was rejected by House Speaker Nancy Pelosi last week, indicating that airlines will have to wait for financing in a broader stimulus package (which also appears stalled).
Meanwhile, the results from Delta and United should give investors a window seat into whether there is life in business and international travel. As two of the Big Three legacy carriers, Delta and United relied heavily on business and international fares to lift revenue and profit ( American Airlines Group(AAL) is the third). But the recovery has been fueled by leisure travel, so far, leaving both carriers with deep holes in revenue.
Nonetheless, some analysts see demand trends improving slightly and argue that the stocks could jump on slightly less-bad news.
Seaport Global Securities analyst Daniel McKenzie writes that consensus estimates for the industry look conservative heading into third-quarter earnings. He notes that supply/demand dynamics have "inflected positively" for the 12th week in a row, leaving the industry on stronger footing heading into the fourth quarter.
That said, the stocks are still highly sensitive to news about the pandemic and a vaccine. And the industry can't do much more to stimulate demand, which is shaping up to be worse than expected in the fourth quarter, attributable partly to concerns about a second virus wave around Thanksgiving and Christmas
McKenzie maintains Buy ratings on all the major U.S. carriers, including Delta, United, and American, based on a recovery outlook for 2021. But near-term he expects the industry to post more heavy losses, including $8.5 billion in the fourth quarter, with "a downward bias tied to a second wave that appears increasingly likely per experts."
Delta stock was down 0.9% near midday Monday. United and American shares were down 1.8%. The Dow Jones Industrial Average was up 0.9%.
Write to Daren Fonda at daren.fonda@barrons.com |
