Delta Air Lines Q1 Earnings Overview: Top Talking Points (NYSE: DAL)

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First quarter earnings season is upon us. It all starts with financial services companies and airlines reporting their results and providing additional information on what to expect over the coming months.

Among the tunes carriers, I will be particularly interested in Delta Air Lines (NYSE: DAL), the most valuable company among the Big 3 legacy players and one of the best bets for investors looking for quality play in an otherwise risky industry. The Atlanta-based airline is expected to release its earnings report on April 13, before the opening bell.

Analysts expect Delta to report nearly $9 billion in revenue, more than double the previous year’s figure, as the industry recovers from the COVID-19 crisis. Lower in the P&L, net loss per share of $1.27 is expected to be impacted by significantly higher fuel costs in early 2022.

Pay attention to the story

There are a few important themes I think investors should keep an eye on during airline earnings season, and specifically on Delta earnings day. The first is expected to be generally bullish: the shift in consumer demand toward services and experiences, after the end of pandemic-era shutdowns, from products and at-home offers that were in vogue last year and during the most of 2020.

As the graph below shows, airport traffic, as measured by the number of trips to TSA checkpoints, has increased significantly in recent times. The effects of the COVID-19 crisis on traveler demand have almost dissipated at this stage: airport traffic in April 2022 exceeded 90% of pre-pandemic levels, after Omicron pushed this ratio to 70 % earlier in the year (see table on the right).

I also expect Delta CEO Ed Bastian and his team to report strong pricing, supported by rapidly increasing demand for air travel. In his most recent CPI report, the U.S. Bureau of Labor Statistics reported a 13% year-on-year increase in air fares in February, the highest of any non-energy services inflation subcategory. To be fair, price strength could be seen as a positive for revenue resilience, but it likely won’t do much to offset the pressures on jet fuel price margins that have climbed nearly 130% year-over-year.

Airport traffic: average over 7 days and 2022 in % of 2019

Airport traffic: average over 7 days and 2022 in % of 2019 (DM Martins Research, TSA data)

The second theme should be of slightly more concern to investors: airlines’ ability to manage the recovery in demand while dealing with labor shortages and increased operating costs. Recently, JetBlue (JBLU) and Alaska Air (ALK) announced significant capacity reductions over the spring and summer weeks, with the latter blaming pilot shortages compared to what the company had previously forecast for April.

All told, on Delta results day, I wouldn’t be surprised to see a combination of:

  • Capacity pressures in the first quarter and similar expectations in the near future, due to operational challenges (including winter weather conditions) and staffing shortages.
  • High occupancy rates and high revenue per unit thanks to improved post-pandemic demand.
  • Significant margin constraints caused by soaring crude oil prices and operational disruptions.

Why DAL rather than its peers?

I believe that anyone considering investing in the airline industry today should first consider industry strengths which are a mix of positive factors (e.g. picking up demand, including struggling companies and international vertical markets) and negative (e.g. high costs and capacity constraints). It’s hard to be overly optimistic about space, in my opinion. Rather, I believe that uncertainty and volatility will play a large role in the performance of airline stocks for the foreseeable future.

Due to the high risk of investing in the sector, especially now, I think choosing the highest quality assets makes the most sense. For this reason, I think DAL is a good buy compared to its peers.

In September 2018, after my first in-depth airspace study, I chose Delta as the best major US airline to invest in. Over the next three and a half years, as shown in the chart below, DAL outperformed the airline peer group by just a little and my least favorite legacy airline stock by many.

Total return DAL vs AAL vs JETS
Data by YCharts

For the same reasons I outlined at the time, including superior domestic linkages and a strong balance sheet, I maintain the same view on DAL. While I remain cautious about the airline industry as a whole, I still believe Delta will prove to be a better long-term investment compared to the rest of the pack.