Shares of Delta Air Line (NYSE: DAL) are trading higher this week after the company said it expects its revenue to return to pre-pandemic levels in the current quarter, driven by stronger travel demand and higher fares that helped the carrier offset elevated fuel costs.
Coming Close to 2019 Levels
The company updated its forecast just a few days after it announced it plans to reduce its schedule in a bid to stop flight disruptions that affected tens of thousands of passengers in May, with hundreds of flights managed by Delta and other carriers canceled or delayed over the Memorial Day weekend.
Apart from schedule reductions through June, Delta will also cut 100 daily flights in the U.S> and Latin America from July 1 through August 7, the company announced last week. It expects capacity in the second quarter to be around 82-83% of 2019 levels.
Before the latest update, Delta expected its sales to be about 7% below 2019 levels. The airline also hiked its margin forecast for the second quarter in spite of higher fuel costs. Delta said it expects costs excluding fuel to be up 22% from pre-pandemic levels, topping the initial forecast of 17%.
U.S. airlines are expecting a solid rebound in travel demand this summer, even though record-high inflation led to significantly higher prices across all sectors. Carriers hope to return to sustained profitability this summer after sustaining unprecedented losses during the coronavirus pandemic which caused nationwide lockdowns and travel bans.
In response to the rising inflation, airlines boosted their fares to offset the record-high fuel prices, allowing major U.S. carriers including Delta, United Airlines, Southwest Airlines, and JetBlue Airways to hike their revenue forecasts.
How Did Delta Perform Recently?
In April, Delta reported a Q1 2022 adjusted loss per share of $1.23, compared to the analyst expectations of a loss per share of $1.27. Revenue came in at $9.35 billion in the first quarter, topping the consensus estimates of $8.92 billion.
The airline saw a net loss of $949 million in the first quarter of the year, while sales remained down 11% from its pre-pandemic levels in 2019. The company’s Q1 fuel expenses rose 6% from 2019 to $2.09 billion, despite its capacity being down 17% in the period. The company said jet fuel costs have more than doubled from 2021 and are up over 50% since the start of 2022.
Delta ended the first quarter with $12.8 billion in liquidity and reported notable improvements in other areas of its business, including a $1.2 billion revenue from its American Express credit card partnership, up 25% from the same quarter in 2019.
“As our brand preference and demand momentum grow, we are successfully recapturing higher fuel prices, driving our outlook for a 12 to 14 percent adjusted operating margin and strong free cash flow in the June quarter,” said Delta CEO Ed Bastian said in the quarterly earnings release.
UBS analyst Myles Walton upgraded DAL’s rating to Buy from Neutral earlier this year, citing expectations of much better pricing this year. The analyst also raised the price target on Delta’s shares from $44 per share to $53 per share.
“The implied 12% improvement in TRASM in 2Q22 vs. 2Q19 is well ahead of the mid-SD we thought possible and implies a unit revenue gain 35% larger than the unit cost increase due to fuel highlighting the current ability of Delta to push through elevated costs,” Walton wrote in a note to clients.
While Delta has been slower than its competitors to restore capacity, the company has managed to deliver a consistent operating performance “and we suspect share pick-ups as others struggle,” Walton added.
Summary
Delta Air Lines’ positive trading update, coupled with strong travel demand, is helping shares to recover after plunging nearly 70% in response to the pandemic.
