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Is Delta Airlines (DAL) a Winner in the Airline Industry?


The global aviation industry suffered greatly during the pandemic as airlines lost a whopping $84 billion in 2020. They are expected to lose about $47 billion in 2021. In total, airlines will lose more than $201 billion between 2020 and 2022 due to complications brought about by COVID-19. 

Still, the aviation industry is massive and is expected to record substantial growth in the coming years, barring another pandemic. Before the pandemic, the industry was valued at more than $818 billion. 

While airline demand is continuing to rise, the stock prices of most companies in the sector have lagged the broader market while the US Global Jets ETF (JETS) has dropped by more than 20% from its highest point this year. It has barely moved at a time when the S&P 500 index has soared to an all-time high. This performance is mostly because of the slower-than-expected recovery of international travel and erratic rules. The companies are also battling rising energy costs as inflation has sent oil to a seven-year high, north of $80 per barrel.

In this article, I will look at Delta Airlines (DAL) and establish whether it is a good investment during the recovery.

Delta Airlines Has Struggled

Delta Airlines’ stock price started the year on a positive note, rising from about $40 to $52 in the first quarter. At the time, there was a sense of optimism that airline demand would soar as countries ramped up their vaccinations. Since April, the stock has crashed into bear territory despite the company’s improving outlook.

For example, Delta has seen its revenue improve in the past few quarters as it has also clawed back to profitability. In the first quarter, its revenue was more than $4.1 billion, up from $3.9 billion in the final quarter of 2020. This trend continued and the company’s revenue rose to $7.1 billion in the second quarter and $9.1 billion in Q3. 

In its most recent quarter, the company made a profit of about $652 million as demand continued to rise. However, management expects that the rising jet fuel will hurt its profitability in the fourth quarter

Still, there are several reasons why Delta Airlines stock is a good investment. First, as a leading player in the transatlantic route, the company will be a key beneficiary as it continues to reopen. In the third quarter, the transatlantic route improved by 20 points from the second quarter. This trend will continue now that the US and European countries have started allowing vaccinated people to travel.

Second, while more companies are allowing people to work from home, there is a possibility that the lucrative business travel will bounce back. Business travellers tend to pay more than tourists since most companies are comfortable paying for business and first class. 

In the third quarter, the firm said that business travel had risen by 30% and the trend will likely continue. Some analysts expect that business travel will recover fully in 2024

Third, there is a sense in which the Delta Airlines stock price is undervalued. For example, a discounted cash flow calculation by Simply Wall St shows that the stock is trading at a 60% discount. 

Source: Simply Wall St

At the same time, the company has a trailing twelve-months price to cash flow of about 17 is significantly lower than where it was historically. This is mostly because of the pandemic but with growth coming back, the company should be trading at a relatively higher multiple.

Another bullish catalyst for the company is that global travel is expected to boom in the coming months. For one, many people stayed at home in 2020, as they did that, they increased their savings, which many will likely use to travel. Also, many people have not seen their family members and colleagues living in other countries for a while. Therefore, the recovery could likely be stronger than expected. The company’s CEO expects that a full reopening will happen by summer.

The biggest challenge for Delta Airlines is the rising fuel prices. However, it is an industry-wide problem that is affecting all airlines. Additionally, oil prices are cyclical, meaning that prices will likely stabilize in the near future. 

On the weekly chart, we see that the DAL stock price has been in a bearish trend lately. Along the way, it has declined below the 25-day and 50-day moving averages (MA). It has also moved below the 50% Fibonacci retracement level. While these are bearish signals, we also see that it has formed a bullish flag pattern. In price action analysis, a bullish flag pattern is usually a sign that a price will make a comeback. 

Source: TradingView

The Bottom Line

Delta Airlines stock has been under pressure as of late brought about by pandemic and economic policy. This trend accelerated after the company warned about the rising energy costs. 

Despite this bearish sentiment, I remain optimistic that the company will bounce back as travel continues to recover. 

In addition, the stock is relatively undervalued and the average price target of the stock is $52. It has also formed a bullish flag pattern. Therefore, I expect that the stock will rebound in the not too distant future.

Crispus Nyaga

Crispus Nyaga is a financial analyst and trader with almost a decade of experience in the industry. He graduated with a BSc degree in 2013 and an MBA in 2017. He has published in leading financial publications like InvestingCube, Bankless Times, Invezz, and Seeking Alpha. He focuses mostly on American and European equities, cryptocurrencies, commodities, and currencies. He is an avid golf and Formula 1 fan.

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