We Maintain our $43 FVE for Delta Amid Nascent Travel

No-moat-rated Delta DAL reported a challenging fourth quarter to end 2020, as the pandemic continues to dramatically reduce air travel demand. Despite the pandemic, we continue to see clear reasons to expect a resounding recovery post-vaccine in both leisure and business travel. We are maintaining our $43 per share fair value estimate for Delta.

Passenger revenue fell by about 74% on a 44% decline in available seat miles, a 51% decrease in passenger load factors, and a 3% decline in passenger yields. Although revenue declined substantially year over year, it increased by 30% from the previous quarter. The increased revenue allowed Delta to reduce its average daily cash burn to $12 million this quarter from $24 million in the previous quarter. We anticipate that demand will return sharply in the second half of 2021 because we expect that COVID-19 vaccines will be broadly available. We note that Delta’s website views are up 40% quarter over quarter, but that website views to purchases are quite low. We think this dynamic is indicative that people want to travel for leisure but are not quite yet comfortable enough to do so. Delta released encouraging data on corporate travel. Delta’s survey of corporate customers indicated that 53% of large corporate customers expect to be traveling at 2019 levels by 2023, 7% expected to never be back at 2019 levels and 42% were not sure. We think this is an encouraging signal that both corporate travel will return in a reasonable timeframe and that a large proportion of corporations intend to resume travel operations as usual in a post-pandemic world.

Adjusted unit costs (excluding fuel) increased 8% year over year to 12.57 cents per seat mile but declined 21% from the previous quarter’s 15.96 cents per seat mile. The primary driving factor behind this improvement was increased capacity which allowed the airline to spread fixed costs over a larger base of seat miles.

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