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Why Shares of Delta Air Lines Are Falling Today

By Lou Whiteman - Feb 28, 2020 at 3:57PM

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Odds are growing the airline will have to scale back operations further as it deals with the coronavirus impact on travel.

What happened

Shares of Delta Air Lines (DAL 2.26%) traded down more than 4% on Friday and are off more than 20% over the past five days, as investors in airline stocks continue to fret over the COVID-19 coronavirus outbreak's impact on the travel industry. Friday's fall followed a move by a Delta rival to curtail operations that could be a preview of what is to come from Delta.

So what

Delta and the other airline stocks have been hit hard on growing concern that the coronavirus' spread into new regions will depress travel demand during the peak summer vacation season, impacting earnings well beyond the first quarter.

The latest evidence of the deepening impact the coronavirus is having on global travel came on Friday, when Delta rival United Airlines Holdings said it was suspending all service to Asia. Many airlines suspended service to China in late January as the outbreak was beginning to intensify, but United is now expanding the pulldown in response to the epidemic spreading into new countries.

A Delta jet at the airport.

Image source: Delta Air Lines.

The decision to suspend operations is likely a wise one, as United said in a regulatory filing earlier in the year that it is seeing a 75% decline in near-term demand for transpacific travel. From an economic perspective, it is better for the airlines to not fly than take on the expense of operating empty aircraft.

Delta has already cut its weekly number of flights to Seoul, South Korea, home base of its important regional partner Korean Air. While United has more exposure to Asia than Delta does, Delta's partnership with Korean Air and its Seoul gateway are an important, and growing, part of its international network. With United's decision, the odds that Delta will have to eventually stand down that operation temporarily have grown.

Now what

Delta investors are forced to contemplate the near-term future of the airline's Asia network while at the same time digesting news that the airline's long-serving CFO will step down once a replacement can be found. Add it all up and that's plenty of uncertainty at a time when the market is risk adverse.

Delta remains the best-run major U.S. airline, and the stock after this week's sell-off trades at roughly 0.67 times sales and 6.5 times expected earnings. Even with earnings likely to be revised down in the weeks to come, that's still an affordable valuation for a best-in-class company.

It might be time to be greedy when others are fearful.

Lou Whiteman owns shares of Delta Air Lines. The Motley Fool owns shares of and recommends Delta Air Lines. The Motley Fool has a disclosure policy.

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