Investment Thesis
In our estimation, the risk and reward of a Delta Air Lines (NYSE:DAL) investment does not favour the common shareholder. In this article, we will analyze how the world has changed for the airlines, what the risk of bankruptcy is, and what the reward is should Delta survive.
Why Buffett Sold
Warren Buffett sold his stake in Delta Air Lines in the depths of the pandemic, Q2 2020, and has since received criticism for selling at the bottom. Asked why he sold at the 2020 Berkshire Hathaway Annual Meeting, Warren Buffett referenced a change in consumer behaviour that could last beyond the pandemic. He did not say that the airlines would immediately go bankrupt, but it seemed his probabilities had changed. Along with the economics of the industry, Buffett changed his mind. But should you?
The Operating Environment
2019 was a fantastic year for airlines, the price of jet fuel was low, employee wages were low, business travel was in abundance, flight restrictions were limited, and international travel was booming. Delta Air Lines reported a profit of $4.8 billion. If the company should ever return to this level of profit, it would represent a PE of just four (On the current market cap).
Today, Delta Air Lines faces a less favourable macro environment. Employee wages have risen. International flights are hampered by the war in Ukraine. And, the price of oil and jet fuel is high:
Labour and fuel make up a huge portion of airline costs, and this was the case even before the recent changes took shape.
Airline operating costs in 2019:
Going forward, we would expect international travel to rebound, especially if there is peace in Europe. However, if the war in Ukraine should spill over and involve NATO, there could be further restrictions in the years ahead.
A large portion of the business travel we once saw is likely gone….