Delta Air Lines, Inc. (DAL) reported  $652 million in net income in its fiscal second quarter (ended June 30, 2021). It is  the first quarter for which DAL has reported a profit since the onset of the COVID-19 pandemic. U.S. government aid and a surge in domestic travel in the summer have helped the airline generate a profit in its last reported quarter. The Atlanta, Ga.,-based company is also seeking to cut its pandemic debt burden with a bond call.

However, the stock has retreated 10.6% over the past three months and 6.2% over the past month to close yesterday’s trading session at $41.67.

DAL’s business travel and international travel segments, which are more profitable, higher-margin businesses, continue to be impacted by the spread of the coronavirus Delta variant. Furthermore, many investors are worried about the possibility of business travel failing to return to pre-pandemic levels with advancing technology facilitating improved remote work arrangements. There has also been a tempering in hedge fund sentiment toward the stock lately. So, its near-term prospects look uncertain.

Here’s what we think could influence DAL’s performance in the near term:

Positive Developments

DAL announced on July 26 that it plans to  more than double the number of daily flights between the U.S. and Canada beginning September because  Canada is reopening its borders to fully vaccinated U.S. travelers for the first time in over a year. In addition, DAL and Kenya Airways PLC expanded their codeshare agreement last month, increasing the choice of destinations offered by the company in Africa and extending Kenya Airways’ reach in North America via the U.S.’ New York-JFK gateway.

On July 1, DAL and Corporate Travel Management signed a three-year sustainable aviation fuel (SAF) agreement to reduce lifecycle emissions by 209 metric tons of carbon dioxide, in a step toward boosting sustainable air travel.

Weak Financials

For the second quarter ended June 30, 2021, DAL’s total operating revenue declined 43.2% from the second quarter of 2019 to $7.13 billion. Its net income decreased 54.8% from the second quarter of 2019 to $652 million, while its EPS declined 53.8% over the same period to $1.02.

DAL’s revenue passenger miles declined 47.3% from its  fiscal 2019 second quarter to 33.29 billion, and its available seat miles decreased 32.4% over the same period to 48.53 billion. The company’s adjusted net debt in the quarter came in at $18.30 billion, $7.8 billion higher than December 2019.

The Resurgence of COVID-19 Cases Dampens Growth Prospects

The rapid spread of the highly contagious COVID-19 Delta variant has caused a resurgence of cases in several parts of the world, including the United States, the U.K, and Singapore, heightening fears of potential travel restrictions. Last week, due to the surge in cases, several counties in  California and Nevada advised all residents to wear masks in public indoor settings—whether vaccinated or not. Also, there is uncertainty about the effectiveness of current COVID-19 vaccines against the new variant. So, airlines such as DAL could be severely impacted if strict travel restrictions are again implemented.

POWR Ratings Reflect Uncertain Near-Term Prospects

DAL has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. DAL has a C grade for Value. This is justified given its forward EV/EBITDA and P/B of 95.77x and 9.60x, respectively, which are higher than the 12.65x and 3.02x industry averages.

Furthermore,  the stock has a D grade for Stability, consistent with its 1.43 beta.

DAL is ranked #7 of 29 stocks in the F-rated Airlines industry. Beyond what we’ve stated above, we’ve also given DAL grades for Growth, Momentum, Sentiment, and Quality. Get all the DAL ratings here.

Better than DAL: Click here to access two top-rated stocks in the Airlines industry.

Bottom Line

Even though analysts expect DAL’s revenue to increase 45.6% year-over-year to $39.76 billion in its fiscal year 2022, its EPS is expected to decline at a 23.7% rate per annum over the next five years. The stock is currently trading lower than its 50-day and 200-day moving averages of $43.58 and $45.03, respectively, indicating that it is in a downtrend. The stock could keep losing in the near term owing to the potential for new travel restrictions due to the spread of the COVID-19 Delta variant.  So, we think it is  wise to wait for a better entry point to scoop up its shares.

DAL shares fell $0.32 (-0.77%) in premarket trading Tuesday. Year-to-date, DAL has gained 2.91%, versus a 18.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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