CrowdStrike Outage Prompts BofA to Cut Delta Estimates
Shares of Delta Air Lines (NYSE) experienced a notable dip of 5.9% in pre-market trading on Monday, 9:05 am ET (01:05 GMT), following BofA Securities’ revision of its forecasts in light of the substantial disruption triggered by the CrowdStrike (NASDAQ) technology outage that occurred last month.
The brokerage has assessed the financial toll of this disruption on Delta at a staggering $500 million.
In response to this unforeseen complication, BofA has recalibrated its earnings per share (EPS) projections for the third quarter of 2024 and the entire year to $1.23 and $5.62, respectively, a downward adjustment from earlier estimates of $1.83 and $6.20. This reduction is largely attributed to the cancellation of over 5,500 flights.
Despite the downward revision, BofA retains its “Buy” recommendation and a price target of $55 for Delta. Analysts contend that investors are likely to eventually shift their focus from the immediate fallout of the outage to the airline’s long-term potential.
Key Impacts
The technology disruption is anticipated to influence Delta in two primary aspects:
Reduced Revenues: BofA estimates that two-thirds of the $500 million financial loss can be attributed to revenue erosion from canceled flights. Consequently, the forecast for 3Q24 unit revenue has been revised downward to -4.0% from -2.8%.
Increased Costs: The remaining one-third of the loss is ascribed to heightened expenses, particularly in passenger services, compensations, and other operational costs. This has prompted an upward revision of the 3Q24 unit cost forecast to +5.1% from +1.5%.
However, BofA’s forecasts do not incorporate potential prolonged effects or diminished bookings resulting from the outage.
Legal Actions and Outlook
Delta has embarked on legal proceedings against CrowdStrike and Microsoft (NASDAQ) in an effort to recoup the losses incurred from the outage.
“While the likelihood of Delta’s success in these claims remains uncertain, given the global ramifications of the outage and its impact beyond the airline industry, we anticipate that any compensation proceedings may be protracted,” analysts observed.
Notwithstanding the hurdles imposed by the technology outage, BofA maintains an optimistic view on Delta’s future.
The brokerage highlights Delta’s robust operational performance, consistent earnings prior to the pandemic, and strategic focus on capacity management as pivotal strengths.
Moreover, Delta’s potential for generating free cash flow is recognized as a significant advantage relative to its peers.
BofA’s $55 price target for Delta is based on a valuation of approximately 5.5 times its estimated EBITDA for 2025. The firm believes that network carriers typically trade within the historical valuation range of 4-6 times EBITDA.
Potential threats to this price target include: escalating fuel prices, economic downturns, sluggish recovery in corporate travel, regulatory challenges, safety concerns, a prolonged government shutdown, and geopolitical uncertainties.
