When Delta Airlines kicked off airline earnings today, earnings didn’t even meet analysts’ low expectations. Delta’s third quarter results included a $2.6 billion adjusted pre-tax loss on adjusted revenues of $2.6 billion. That works out to a loss of $3.30 a share; analysts had predicted a loss of $3.10 per share. United will report tomorrow.
Delta led the airlines lower, closing down -0.87 to 31.77, a 2.67% decline. This year Delta stock is down 45.67%. United Airlines closed at 35.26, down -1.12 or -3.08%. United is down 59.5% for 2020. American Airlines closed at 12.22, down -0.7, or -5.42%. For the year, American is down 55.5%. Southwest Airlines closed at 39.13, down -0.06 for the day. For the year, Southwest is down 27.43%.
(Full disclosure: I own stocks in Jet Blue, American Airlines and Southwest.)
About the only thing Delta’s third quarter earnings look good compared to are its second quarter earnings. For the quarter ended June 30, Delta reported an adjusted pre-tax loss of $3.9 billion on just $1.2 billion in revenue. Stockholders were looking at a loss of $4.43 per share. And these are adjusted numbers; third quarter GAAP losses were $6.9 billion, a hair down from $7.0 billion in second quarter losses.
Modestly good news for Delta was that the airline has succeeded in limiting its cash burn. Delta’s average daily cash burn was $24 million during the quarter, dropping to $18 million per day for the month of September. Second quarter cash burn was $43 million per day.
That second quarter included all of April, which thanks to the COVID-19 pandemic was one of the worst months in airline history. Airline traffic dropped 96% in April 2020 compared to April 2019. By August, air travel was “only” down 70% from August 2020. But US air travel in August 2020 was up just 2% from travel in July 2020.
Cutting cash burn (a painful process of parking planes and people) helps an airline’s chances of survival. Delta even dropped their airline magazine. But all the belt-tightening doesn’t address the demand side of the equation. The problem is essentially the same as in April 2020, when Bill Franke of Indigo Partners, owners of Frontier Airlines, said “There will be an effort to convince the customer that it’s safe to travel. There should be some process where everybody who gets on an airplane knows that every other passenger doesn’t have a fever.”
Of course, people do not get on a plane without a destination. And if that destination, like most, is impacted by the virus, why go?
For example, I am a Los Angeles Dodgers fan. The Dodgers have advanced to the National League Division Championships, being played before actual fans (not pieces of cardboard) at the Rangers stadium in Arlington, Texas. Socially distanced tickets are available for as little as $64.
But I’d have to leave my house, take an Uber to LAX, go through the airport, and get on a place to Dallas. There, I’d have to go through the airport, get a rental car and drive my hopefully-clean hotel. The next day, I’d go to the ballpark where thousands of vectors (err, people) have gathered. The risk level in Los Angeles is Widespead, while Tarrant County, home of Arlington Stadium, is only Substantial. When my son called my plan “dangerous,” I was persuaded not to go.
Although flying appears safe, there is still a worldwide reluctance to travel. The International Air Transport Association (IATA) downgraded its traffic forecast for 2020 based on a weaker-than-expected recovery. On a worldwide basis, IATA expects full-year 2020 traffic to be down 66% compared to 2019.
For US domestic carriers, IATA said August traffic was down 69.3% compared to August 2019,. IATA blamed an increase in US outbreaks and quarantines for the “disappointing result.”
But US domestic travel looked great compared to total international travel. August international passenger demand plummeted 88.3% compared to August 2019, barely an improvement over the 91.8% year-over-year decline recorded in July. (Remember crowded airports and packed planes full of eager vacationers?
To be sure, Delta has been making progress on the international front. In June it became the first US airline to resume service to China. In August it announced it would resume service on 50 international routes, including daily flights from Seattle to Tokyo, Seoul, Beijing and Shanghai.
American, Delta and United had much more of an international footprint than Southwest. The Big Three were also far more dependent on business travel. With both business and international travel heavily impacted by the pandemic, so far the stock prices of the Big Three US airlines have been more heavily affected than Southwest.
A truer barometer of Wall Street sentiment on airlines might be the bond, rather than the stock, market. Marketwatch says if a “blue wave” (Democratic sweep) is coming, you should be on the lookout for junk bonds. There are plenty of high yielding sub-investment grade (aka junk) bonds from Delta and United in the bargain bin.
One is a Delta Air Lines bond with a maturity date of 01/15/2026, a 7.375% coupon and yield-to-worst of 5.77% (CUSIP 247361ZZ4). But the bond is junk-rated at B+ by Standard and Poor’s with a negative credit watch. meaning that the rating agencies believe it bears a higher risk of default.
Risk-lovers might look at bonds from United Airlines Holdings. One maturing on 01/15/2025 (CUSIP 910047AK5) is trading below par, at 89.00, while offering a potential yield to maximum of 7.97%. The United bond is a junk-rated B, with a negative credit watch.
Fidelity has a handy list of ratings by bond ratings leaders, S&P, Moody’s and Fitch. The lowest “investment grade” rating from Standard and Poor’s is BBB-. The Delta bond is rated by S&P as four levels below “investment grade;” the United bond, five levels below. Fitch lowered American Airlines ratings to B- in n September, noting, “The likelihood that air traffic will remain subdued for the next several years combined with American’s heavy debt load create significant pressure on credit metrics.”
Of course, ratings can change. And the availability of a COVID-19 vaccine might make a huge difference. But the low bond ratings show that Wall Street is currently making a bearish case. The airline industry needs money, from the government, from investors, from somewhere. But most importantly, it needs customers.