When Delta Air Lines kicks off the first-quarter earnings season on Wednesday, the air carrier’s results and forecast will offer a deeper look at how well U.S. customers and companies can withstand surging oil and fuel prices due to the war in Iran.
Delta, along with Levi Strauss and Constellation Brands, will report this week after the U.S. economy in March — the first full month of the war — added more jobs than expected, although the war’s impactcould be felt more acutely later on. But even with no shortage of things for consumers to worry about, corporate America overall offered up more optimism than normal for the first quarter.
This week’s results — along with quarterly financials from the banks, tech companies and retailers in the weeks ahead — will put that rosier view to the test.
Wall Street expects the companies in the S&P 500 Index, collectively, to increase their per-share profits by 13.2% in the first quarter, according to a FactSet report released on Thursday. That would be the sixth consecutive quarter of double-digit percentage gains, continuing a trend of strong corporate profit despite consumer struggles with higher costs of living.
Bigger profit expectations for the energy industry, thanks to the spike in oil prices, have also helped pad that estimated figure. The price of oil jumped 77% during the quarter, FactSet said.
Moreover, the number of companies that have issued better-than-expected profit forecasts for the first quarter stands at 59, the highest in five years. Many of those forecasts came before the war. But some retailers have since said they weren’t worried about higher gas prices, even as consumers grapple with nearly a half-decade of more expensive essentials.
Delta’s results will arrive as the war sinks airline stocks but travel demand shows signs of holding up, at least for now, and as the airline and some of its rivals chase higher-income consumers to offset deeper hesitations among everyone else.
Fuel is generally among the biggest costs for an airline, which means profits take a hit when prices rise. Since the U.S. and Israel attacked Iran on Feb. 28, the U.S. Global Jets ETF, a fund that allows investors to play the broader airline industry, has fallen around 12%.
TD Cowen analyst Tom Fitzgerald summed up his thoughts on airline stocks this way: “Well, there’s always next year.”
“The likelihood of a prolonged period of higher energy prices, decelerating credit card data and channel checks have investors skeptical on how inelastic air travel demand can be,” he added.
Yet Delta’s stock is actually up around 2% since the war started. Fitzgerald called Delta the “most defensive” airline stock over the longer term, since it has its own oil refinery.
However, he said he’d have questions about how the war has affected flight schedules, corporate travel and longer-term spending, and how much of a cushion Delta’s premium seating classes might offer against volatile fuel prices. A winter storm that led to thousands of flight cancellations, as well as the partial government shutdown, which led to long lines at airports, could also be focal points for Delta’s call.
Delta’s results will land as anxiety endures over the so-called K-shaped economic recovery, under which fortunes for rich people go higher, while those in the middle and lower-income brackets go lower or stay in place.
Joe Esposito, Delta’s chief commercial officer, said at a conference last month that Delta served “top end of that K.”
“That’s a group that wants to continue to invest and is, candidly, a bit immune to what goes on with geopolitical events, different elements,” he said.
He said that consumers were still spending, despite anxieties over what direction the economy might take. Travel, he said, remained in demand.
“We’ve seen so much happen over the course of the last decade,” he said. “People are not sitting home waiting and wondering what’s going to happen, which is a very different phenomenon.”
Elsewhere, cruise-liner Carnival said last month thatdemand for cruises was stronger than ever, even as fuel costs weighed on its profit expectations. Executives at FedEx, which uses jets to ship a lot of packages, saidthey didn’t expect a big hit to businessdue to the Middle East conflict or rising fuel costs.
Still, as the war continues, recent results from companies like luxury furniture chain RH suggested greater caution among the wealthier consumersthat airlines like Delta and United Airlines are trying to court. However, discount chain Ross Stores last month talked up a “very strong start” for spring shopping.
Meanwhile, Constellation Brands, which sells Corona and Modelo in the U.S., will report results on Wednesday, after the company in February said its board appointed Nicholas Fink as its next CEO. That move that takes hold on April 13.
TD Cowen analysts said the appointment of Fink, a Constellation board member who will succeed Bill Newlands as CEO, signaled little change in strategy. But UBS analysts said the company could try to give itself more flexibility for a wider range of outcomes in its financial forecast, due to the the leadership change and a shakier economic backdrop.
Last year, Constellation said its Hispanic consumers, which make up around half of its beer business, were going out less frequently, amid worries about higher prices and President Donald Trump’s aggressive deportation efforts. A weaker construction market has also made for weaker beer demand.
For Levi’s, which reports on Tuesday, the focus for Wall Street will likely be on the war’s impact on shoppers’ attitudes, as the jeans maker tries to expand its denim selections. At a conference last month, the company downplayed the threat.
Levi’s said then that the Middle East accounted for less than 1% of its business. The denim maker said the amount of product it got through the Strait of Hormuz, a major oil shipping lane that Iran has largely locked down, was “very, very minor.”
“We went back […] and looked at what happened in 2008, what happened in 2011, what happened with the Russia-Ukraine war,” Harmit Singh, Levi’s chief financial and growth officer, said. “The thing that we saw was sales didn’t suffer at all. There was not a dramatic impact.”
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