Delta Air Lines (DAL), a major player in the airline industry, is navigating a turbulent landscape, facing multiple headwinds that threaten to impact its financial performance. The combination of overcapacity in the airline market, a disruptive technology outage, and rising labor costs has cast a shadow over DAL’s prospects, leading to a decline in earnings estimates and a bearish outlook for the airline.
The overcapacity in the U.S. airline market, a consequence of an abundance of seats added by discount carriers, has pressured airlines, including DAL, to lower airfares despite rising costs. This pricing pressure is expected to negatively impact DAL’s third-quarter results, despite the strong demand for air travel this summer.
Adding to the pressure, a global technology outage in July, caused by a faulty software update from security software provider CrowdStrike, significantly impacted DAL’s operations. The outage, which primarily affected Windows machines, crippled DAL’s flight crew scheduling due to its heavy reliance on Microsoft systems. As a result, DAL was forced to cancel approximately 7,000 flights over five days, resulting in a substantial revenue loss and inconvenience for passengers. The company estimates a direct revenue impact of $380 million from the incident, primarily due to refunds and compensation. Additionally, the outage led to an increase in non-fuel costs by $170 million, mainly due to customer expenses and crew-related costs.
Further compounding DAL’s challenges are rising labor costs, specifically related to salaries and benefits. The increase in these costs is attributed to the pilot contract ratified in March 2023. These escalating costs are expected to further pressure DAL’s bottom line in the coming quarters.
The headwinds faced by DAL have taken a toll on its stock performance, with shares declining by 14.8% over the past three months. This underperformance is a reflection of the uncertainty surrounding the company’s future.
While DAL is trading at a discount compared to its industry peers from a valuation perspective, the negative sentiment surrounding the stock, coupled with the challenges it faces, has led Zacks Investment Research to recommend investors avoid DAL stock. The uncertain outlook and the ongoing impact of these headwinds make it a risky investment at this time.
