The second quarter was supposed to be a severe test for airlines but Delta’s earnings Friday will likely signal that U.S. carriers passed with flying colors. But the sector faces a big challenge to keep the momentum going.
Hikes to airfares, cuts to capacity and relentless travel demand helped airlines mitigate fuel costs, which surged for most of the quarter amid the Iran war. Those three things now need to stay in place to build on the recent rally.
The Global JETS exchange-traded fund, which tracks the performance of airlines, has jumped 22% over the past three months. Delta Air Lines has climbed close to 30% over that period, while United Airlines is also up around 30% and American Airlines has jumped 45%.
A spike in oil prices in recent days, after President Donald Trump said the cease-fire with Iran was over, has put the sector back under a bit of pressure. That weakness may end up helping the shares after the earnings release, giving them a bit more room to run if Delta’s results come in strong before the open Friday.
Analysts are expecting earnings per share (EPS) of $1.49 on revenue of $17.5 billion in the second quarter. That would beat Delta’s own EPS guidance of between $1 and $1.50.
“A quarter that threatened to be significantly disruptive looks to have had a happy ending with strong revenue trends, jet fuel back down below $3 and solid operating/cost performance,” Morgan Stanley analyst Ravi Shanker said in a sector-wide preview of the earnings season earlier this week.
But the industry “faces another big test” in the next six months, he added. That’s whether airfare pricing and capacity will revert to the mean or become the new normal. If it’s the latter, then the industry will “go a long way toward achieving the multiple re-rating that it has been lobbying for and will likely attract more long-term investors.”
Shanker has an Overweight rating on Delta and hiked his price target to $115, from $105, on Monday.
TD Cowen analyst Tom Fitzgerald also said holding on to recent price increases was key. “We remain broadly constructive, assuming the industry hangs on to this year’s price increases,” he said in a note Thursday. “We think the group is broadly set up well for 3Q guidance given a lot of inventory was booked at post-war prices and fuel looks set to be at more manageable levels,” he added.
He rates Delta as a Buy with a $106 price target.
For the third quarter, Wall Street is looking for adjusted EPS of $2.03 on revenue of $17.3 billion.
Any signals on the strength of demand and pricing may be just as important as the numbers.
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