Shares of Delta Air Lines, Inc. (NYSE: DAL) were down 4.5% on July 13 to close at $29.70 after the company reported mixed Q2 results.
There were three major highlights of the earnings release apart from the mixed results that could decide the future course for the Delta stock. First, Delta management’s bullish take on the travel rebound; second, above-consensus projections for the third quarter; and rising costs that could act as a hurdle to higher profitability.
Let’s take a look at all the important aspects.
Delta Predicts Resilient Travel Rebound
As COVID-19 and travel restrictions have eased, demand for corporate travel as well as international leisure travel has returned with a vengeance.
The summer travel season of 2022 was the strongest in the last three years. DAL management reaffirmed that travel demand is very strong and resilient and has not been hit by inflationary pressures or higher interest rates.
Delta stated that its travel bookings for the fall as well as winter months remain resilient. In fact, during the earnings call, Delta Airlines President Glen Hauenstein laid down his expectations that the robust “demand and pricing strength carry into the late summer and fall as demand remains strong.”
What About Higher Costs and Other Issues?
Higher demand means higher revenues, which should translate to higher profitability as well. However, that was not the case with Delta, as seen in its Q2 results, where earnings fell massively short of expectations.
Like its peers, Delta is struggling to meet the pent-up demand that is coming on the heels of higher costs. The carrier trimmed its scheduled flights last month while paying steep premiums and overtime to its staff.
The airline carriers who let go of their employees during the pandemic years are now ramping back capacity and paying overtime, thereby escalating costs.
While headcount has reached 95% of pre-COVID times, the company is expecting to reach pre-pandemic capacity by the summer of 2023.
Fuel prices have touched the sky, increasing 80% since the pre-pandemic levels seen in 2019. The higher fuel prices have thereby led to higher costs as the cost per available seat mile (CASM) jumped 44% compared to the pre-pandemic period in 2Q2019.
DAL’s Upbeat Q3 Guidance
Despite the above-mentioned uncertainties, based on solid demand, Delta has projected revenues in the third-quarter to grow 1% to 5% compared to the same period in 2019. The company expects to post revenue of $12.85 billion at the midpoint of its guidance, much higher than the consensus of $12.5 billion.
Notably, the higher revenues are expected despite 15 to 17% lower capacity levels compared to the corresponding pre-pandemic period in 2019.
Furthermore, the operating margin is projected to be in the range of 11% to 13%.
Wall Street Bullish on DAL
Following the mixed Q3 results and higher costs weighing on earnings, CFRA decreased the price target on Delta Air Lines to $47 (58.25% upside potential) from $55 and reiterated a Buy rating.
Consensus among analysts is a Strong Buy based on 11 Buys and one Hold. The DAL average price target of $50.08 implies upside potential of 68.62% from current levels.
Concluding Thoughts
While Delta Airlines’ management seems confident of the sustainability of the travel rebound, there are impending risks of higher inflation hammering consumer demand that could pull back demand given the increased airfares and higher interest rates.
Shares of DAL have been volatile over the past year, seeing highs of $46.27 but losing one-fourth of their market capitalization overall.
Currently, they are trading close to their 52-week lows of $28.10. This could serve as a great entry point for investors based on expectations that the company is able to generate better profitability on the back of strong demand and top-line growth while cruising through the tides of higher costs and other issues.
