What The Cancellations Cost Delta

Abba's Aces profile picture
Abba's Aces
4.12K Followers

Summary

  • Normal operations were set to resume on Wednesday after about 1,600 cancelled flights.
  • My initial estimate for the total cost to shareholders is roughly $48M.
  • Delta is still a reliable airline and will still be a reliable investment after a couple of weeks which investors can pick up shares at a discount.

Delta (NYSE:DAL) has made quite a few "different" strategic decisions over the past couple of years, like say acquiring a refinery for themselves. But what is puzzling to me is how there is no redundancy strategy plan in place which could have mitigated the issue that occurred to them yesterday, doling out millions of dollars to customers whose flights were cancelled by the airline. How can one power outage cause an entire company's computer systems to go down? There are universal power supplies for such occasions that allow operation companies to come back up in almost an instant when the power goes out.

Normal operations were set to resume on Wednesday after about 1,600 cancelled flights and no closure to the issue on why the problem occurred. The problem was isolated to a malfunctioned switchgear but why that switchgear malfunctioned in the first place is still not evident. I imagine Georgia Power's engineers are working night and day right now trying to figure out the solution to the problem.

Delta's answer to its customers was to hand them vouchers for $200 but with a caveat, their flights had to have been delayed by at least three hours or cancelled. But that $200 may not be enough as European regulation allows passengers whose flights have been delayed by more than three hours or cancelled the opportunity to claim up to €600 if the flight originated from the EU on any carrier.

Let's do some crude math and say on each flight there was a single aisle with three passengers on each side and 25 rows deep, that is roughly 100 passengers on each of those flights. My initial estimate for the total cost to shareholders is roughly $48M. To put things into perspective, the company raked in $10.4B in revenue last quarter, threw our $103M in dividends, and had $2.4B in cash on the balance sheet. The company should be able to cover the $48M in expenses easily, but my belief is that it is going to balloon once the litigations start.

I wish I could say there is some precedent to the issue to determine how much it is really going to cost the company but the closest comparison we have is when Southwest recently had a cancellation problem. But Southwest does not yet know how much it is going to cost them and that issue happened just in July.

My co-worker and I were just talking about Delta last week and how it was a great airline. Both of us had the same sentiment about how they have their act together from an operational perspective. We were having the conversation because both of us flew American (AAL) recently for a work trip and swore off American with both our experiences because their flights are delayed all the time. Just on my flight home last Friday with American there was a delay at the airport of origin, and there was a delay at my layover.

As a frequent traveler I believe Delta will get their act together after this debacle and become the most reliable carrier after a couple of weeks when the dust has settled. The problems with American and other airlines is that their delays and cancellations are a habitual problem, this was just a one-time occurrence for Delta.

Just last year Delta went on to criticized American about their operations strategy and went so far to cancel their interline agreement with American which if it was still enacted would have helped Delta save a little bit of face because some of their displaced customers would have been able to take some American flights rather than sitting at an airport. This cancellation that happened last year happened because Delta felt that they were taking on more of the responsibility than American with their passengers due to American's consistent delays. Delta is still a reliable airline and will still be a reliable investment after a couple of weeks when the dust has settled which investors can pick up shares at a discount.

Delta is the poster child for how an airline should operate and was recently acknowledged by American as an excellent operator by which American will look to model itself after. When it is all said and done, it matters what the stock has done in an investor's portfolio at the end of the day. For me Delta has been a dog as I'm down 9.9% on the name while the position occupies roughly 10.9% of my portfolio. However, I continue to believe in the name because of its operation excellence and will continue to accumulate shares as long as they are below $42. I have selected $42 because it is the midway point of the 52-week range of the stock and I believe that it is where the stock adds value to a portfolio. I am up 9.1% in the past year even with this laggard while the S&P500 is up 4.9%. Below is a quick glance of my portfolio and how each position is performing. Thanks for reading and I look forward to your comments.

Company

Ticker

% Change incl. DIV

Portfolio

The Priceline Group Inc.

(PCLN)

23.13%

6.94%

Broadcom Limited

(AVGO)

13.71%

5.81%

Alphabet Inc.

(GOOG)

5.74%

1.91%

Target Corp.

(TGT)

5.65%

8.44%

AbbVie Inc.

(ABBV)

5.21%

4.06%

Electronic Arts Inc.

(EA)

5.07%

4.46%

V.F. Corporation

(VFC)

-0.18%

5.65%

Skyworks Solutions Inc.

(SWKS)

-5.52%

16.44%

Delta Air Lines, Inc.

-9.85%

10.94%

Gilead Sciences Inc.

(GILD)

-9.95%

14.62%

Cash

$

20.75%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

This article was written by

Abba's Aces profile picture
4.12K Followers
I'm a program manager at an engineering consulting company. I manage technical, financial, and commercial risks at every stage of a program both internally and externally for our clients.
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Disclosure: I am/we are long DAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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