$Delta Air Lines(DAL)$ released its second quarter report.
The data shows that Delta's revenue for the second quarter was $13.8 billion, up 10% from $12.5 billion in the same period in 2019, with a load factor of 87%, close to 88% in the same period in 2019. Revenues exceeded analysts' forecasts of $12.33 billion.
In terms of size, it has fully recovered to pre-pandemic levels.
In terms of revenue, $Delta Air Lines(DAL)$ has fully recovered from the impact of the pandemic.
Three major factors led to Delta's 9% plunge
1. Net income fell short of expectations
However, due to inflation and soaring costs, Delta's net income for the second quarter was only $735 million, less than analysts' expectations of $974 million.
2. Revenue has been priced in the early rise
A day before Delta's earnings release, $American Airlines(AAL)$ released in its report that its second-quarter revenue growth was 12% compared to the same period in 2019, beating market expectations of 11.2%.
As a result of this upbeat guidance, US airline sector together surged, with $Delta Air Lines(DAL)$ up 6.15%.
$Delta Air Lines(DAL)$ good revenue have been already priced in the surging share price.
However, net income fell sharply short of expectations, which may have been an important reason for the share price pullback.
3. June CPI data released last night: 9.1%
Earnings Data
Specifically, Delta's net income for the second quarter was $735 million, compared with $1.53 billion for the same period in 2019.
The main reason for the weaker-than-expected net income was the growth in operating costs, which were $12.3 billion in the second quarter of this year, up 18% from the same period in 2019 and well above the 10% revenue growth rate.
The bulk of the increase was mainly in fuel costs, which were up to $3.223 billion in the second quarter, a 41% jump from the same period last year.
Fuel has been a major cost for airlines, accounting for about 18% of revenue before the pandemic; while in the second quarter of this year, fuel has accounted for 23.3% of total revenue.
In addition to fuel, other costs are increasing as well. Dan Janki, Delta's chief financial officer said that:
Our June quarter non-fuel unit cost performance of up 22 percent compared to 2019 was impacted by lower capacity, higher selling-related expenses and investments in operational reliability.
Cost increases resulted in Delta's operating margin of only 11 percent, well below the 17 percent achieved during the same period in 2019.
Future Outlook
Looking ahead to the third quarter of this year:
- $Delta Air Lines(DAL)$ expects capacity to decline 15-17% compared to the same period in 2019
- Total revenue is expected to increase 1-5% compared to the same period in 2019, benefiting from the impact of higher revenue per passenger
- Operating margins remain trapped by costs, which are expected to be 11-13%.
Delta expects to achieve $7 eps and free cash flow of $4 billion by 2024.
This projection implies that Delta could return to its pre-pandemic peak by 2024. Assuming valuations remain unchanged, Delta's long-term trajectory is good.
But with inflation and recessionary expectations, $Delta Air Lines(DAL)$ , which has just emerged from the gloom of the pandemic, needs to beware of a downturn in demand due to the recession.
According to historical experience, the plunge in oil prices, although conducive to reducing fuel costs, but also means economic recession and travel demand decline.
From the airline stock price trends over the years compared with oil prices, when oil prices plunge, airline stock prices will mostly fall in tandem.
Of course, as of now, travel demand remains strong, international routes are in a strong recovery phase, and the risk of a downturn in travel spending has not yet been seen.
This tangle will remain to haunt investors for some time.
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