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Zacks Rank #5 (Strong Sell) stock Delta Air Lines ((DAL - Free Report) ) is known for its travel services for both passengers and cargo. Delta, the second-largest U.S. airline, links customers to locations in the United States and worldwide. The company follows a “hub and spoke system” with hubs located in cities such as Atalanta and New York. Delta offers a range of seating options and amenities through its “SkyTeam” alliance partnerships. The airline is also renowned for its customer rewards program, SkyMiles Delta.
The Inherent Unpredictability of Airline Stocks
Warren Buffett, the most successful value investor of all-time, once quipped, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”
As the COVID-19 pandemic reared its ugly head in 2020, Buffett was forced to panic sell $10 billion worth of Delta, American Airlines ((AAL - Free Report) ) United Airlines ((UAL - Free Report) ), and Southwest Airlines ((LUV - Free Report) ) stock. Though Buffett made the mistake of buying airlines in 2016, like every great investor, he learned from his mistake, cut his losses, licked his wounds, and moved on.
Below are five reasons the airline industry is as unpredictable as ever.
1. High Fuel Costs are Bearish for Delta
OPEC’s ongoing production cuts have caused high fuel costs. Because fuel costs are a major input for Delta, the company has suffered lower margins as energy prices have increased.
Image Source: Zacks Investment Research
2. Geopolitical Tensions Hurt Airline Industry
Rising geopolitical tensions in Europe and the Middle East present a major “Black Swan” threat to the travel industry should global war escalate further.
3. Delta Suffers From Price Wars with Low-Cost Carriers
Weak pricing power is hurting Delta’s EPS. Discount carriers like Spirit Airlines ((SAVE - Free Report) ) currently have excess seats available, causing them to lower fares and steal business from larger airlines like Delta.
Image Source: Zacks Investment Research
4. Rising Costs Ex Energy
In addition to rising fuel expenses, DAL is also burdened with rising non-energy costs. For instance, salaries and related costs jumped 12%. Though rising salaries are not bearish by themselves, I see them as a negative when the stock is performing the way that it has.
5. Unknowns: IT Outage, Boeing Issues
The global IT outage blamed on CrowdStrike ((CRWD - Free Report) ) impacted Delta dramatically, causing the cancellation of thousands of flights. Meanwhile, another unforeseen issue is that Delta has several Boeing ((BA - Free Report) ) airplanes in its fleet. Boeing planes have seen a plethora of mechanical and safety issues over the past few years.
Delta Bear Thesis Continued:
Weak Technical Picture
Delta is exhibiting troubling relative weakness. The stock is flat for the year, while the S&P 500 is up nearly 18%. Worse, DAL’s chart shows a bear flag pattern emerging on the daily chart.
Image Source: TradingView
Negative ESP Score
Zacks in-house studies prove that when a stock has a negative Earnings Surprise Prediction (ESP) score combined with a Zacks Rank #3 or worse, like Delta does, the stock tends to underperform over the next year.
Bear of the Day: Delta Air Lines (DAL)
Delta Airlines Company Overview
Zacks Rank #5 (Strong Sell) stock Delta Air Lines ((DAL - Free Report) ) is known for its travel services for both passengers and cargo. Delta, the second-largest U.S. airline, links customers to locations in the United States and worldwide. The company follows a “hub and spoke system” with hubs located in cities such as Atalanta and New York. Delta offers a range of seating options and amenities through its “SkyTeam” alliance partnerships. The airline is also renowned for its customer rewards program, SkyMiles Delta.
The Inherent Unpredictability of Airline Stocks
Warren Buffett, the most successful value investor of all-time, once quipped, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”
As the COVID-19 pandemic reared its ugly head in 2020, Buffett was forced to panic sell $10 billion worth of Delta, American Airlines ((AAL - Free Report) ) United Airlines ((UAL - Free Report) ), and Southwest Airlines ((LUV - Free Report) ) stock. Though Buffett made the mistake of buying airlines in 2016, like every great investor, he learned from his mistake, cut his losses, licked his wounds, and moved on.
Below are five reasons the airline industry is as unpredictable as ever.
1. High Fuel Costs are Bearish for Delta
OPEC’s ongoing production cuts have caused high fuel costs. Because fuel costs are a major input for Delta, the company has suffered lower margins as energy prices have increased.
Image Source: Zacks Investment Research
2. Geopolitical Tensions Hurt Airline Industry
Rising geopolitical tensions in Europe and the Middle East present a major “Black Swan” threat to the travel industry should global war escalate further.
3. Delta Suffers From Price Wars with Low-Cost Carriers
Weak pricing power is hurting Delta’s EPS. Discount carriers like Spirit Airlines ((SAVE - Free Report) ) currently have excess seats available, causing them to lower fares and steal business from larger airlines like Delta.
Image Source: Zacks Investment Research
4. Rising Costs Ex Energy
In addition to rising fuel expenses, DAL is also burdened with rising non-energy costs. For instance, salaries and related costs jumped 12%. Though rising salaries are not bearish by themselves, I see them as a negative when the stock is performing the way that it has.
5. Unknowns: IT Outage, Boeing Issues
The global IT outage blamed on CrowdStrike ((CRWD - Free Report) ) impacted Delta dramatically, causing the cancellation of thousands of flights. Meanwhile, another unforeseen issue is that Delta has several Boeing ((BA - Free Report) ) airplanes in its fleet. Boeing planes have seen a plethora of mechanical and safety issues over the past few years.
Delta Bear Thesis Continued:
Weak Technical Picture
Delta is exhibiting troubling relative weakness. The stock is flat for the year, while the S&P 500 is up nearly 18%. Worse, DAL’s chart shows a bear flag pattern emerging on the daily chart.
Image Source: TradingView
Negative ESP Score
Zacks in-house studies prove that when a stock has a negative Earnings Surprise Prediction (ESP) score combined with a Zacks Rank #3 or worse, like Delta does, the stock tends to underperform over the next year.
Weak Consumer
Strength in lending stocks like UpStart ((UPST - Free Report) ) shows that the average U.S. consumer is weak.
Bottom Line
The airline industry is notoriously unpredictable. Rising fuel costs and cutthroat competition make Delta stock and avoid.