Shares of Delta Air Lines (NYSE:DAL) was down 5.9% in pre-open trade on Monday at ET 9:05 am (0105 GMT) after BofA Securities lowered its estimates following the significant disruption caused by the CrowdStrike (NASDAQ:CRWD) technology outage last month.
The brokerage has quantified the impact of the outage on Delta at a staggering $500 million.
As a result of this unforeseen setback, BofA has adjusted its earnings per share (EPS) projections for the third quarter of 2024 and the full year to $1.23 and $5.62, respectively, down from previous estimates of $1.83 and $6.20. The firm attributes this decline to the over 5,500 flights canceled due to the outage.
Despite the downward revision, BofA maintains its "Buy" rating and $55 price objective for Delta. Analysts believe that investors will eventually look beyond the short-term impact of the outage and focus on the airline's long-term prospects.
Key impacts
The technology outage is expected to impact Delta in two primary ways:
Lower revenues: BofA estimates that two-thirds of the $500 million loss can be due to lost revenue due to canceled flights. This has led to a downward revision of the 3Q24 unit revenue forecast to -4.0% from -2.8%.
Higher costs: The remaining one-third of the loss is attributed to increased costs, primarily in passenger service, compensation, and other operating expenses. As a result, the 3Q24 unit cost forecast has been raised to +5.1% from +1.5%.
However, BofA's estimates do not account for any potential lingering effects or reduced bookings due to the outage.
Legal action and outlook
Delta has initiated legal proceedings against CrowdStrike and Microsoft (NASDAQ:MSFT) to recover losses incurred during the outage.
“While we are unclear of DAL’s likelihood of success in its pursuit, given the global impacts of the outage and its extension beyond the airline industry, we anticipate that any compensation proceedings would likely be a protracted process,” analysts said.
Despite the challenges posed by the technology outage, BofA remains bullish on Delta's long-term prospects.
The brokerage flags the airline's strong operational performance, consistent pre-pandemic earnings, and focus on capacity discipline as key strengths.
Additionally, Delta's free cash flow potential is seen as a significant differentiator compared to its competitors.
BofA's $55 price objective for Delta is based on a valuation of approximately 5.5 times its 2025 estimated EBITDA. The firm believes that network carriers can trade towards the middle of their historical valuation range of 4-6 times EBITDA.
Potential risks to the price objective include: higher fuel prices, economic weakness, slower corporate travel recovery, government regulation, safety concerns, a prolonged government shutdown, and geopolitical events.