What Vaccine Distribution Means for Delta

No-moat rated Delta DAL reported a bifurcated first quarter as January and February were extensions of 2020's difficult environment, but passenger demand improved materially in March with increased COVID-19 vaccine distribution. We're maintaining our $55 fair value estimate as we slightly increase our expectations for operations this year and greatly increase our expectations of government support this year, but this is largely offset by lower assumptions on sale-leasebacks. While shares are trading somewhat below our fair value estimate, we do not see a compelling margin of safety. We think this quarter's earnings represent the start of a shift in Delta's story. Previously, airlines cut costs and restructured to prepare for when demand returns. Today, leisure demand is returning, and the remaining questions are: how quickly will demand return and how profitable will Delta be on the other side of the pandemic? We continue to view the pandemic as a multiyear shock to travel, rather than a structural change that will permanently impair the airlines, and we expect that restructuring-related efficiencies will produce about 1.7% of incremental operating margin relative to 2019 levels. Passenger revenue declined 70% from the first quarter of 2019 on 65% lower revenue passenger miles, 15% lower yield, and a decrease in passenger load factors from 83% in 2019 to 45% in 2021 (we estimate a 67% load factor after adjusting for the blocked middle seats). Passenger revenue increased 50% in March relative to February (15% higher than normal seasonality) and bookings outside the 60-day window began to return, reflecting travelers' increased ability to make travel plans. Notably, Delta plans to resume selling the middle seat on flights on May 1, which we anticipate will generate immediate operating leverage as aircraft do not have materially different costs on full versus empty flights.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.