As Earnings Season Starts, Expectations Are High For Delta Air Lines

Delta Air Lines will kick off airlines’ first-quarter earnings reporting Wednesday at what seems like a best-of-times, worst-of times period for the industry.

The good news comes daily from the Transportation Security Administration, which reports the number of people who pass through airport security. The numbers show strong travel demand, fed by hope that the pandemic has ended. On Monday, for instance, 2.18 million people cleared security, up 49% from the same day a year earlier.

On the negative side, fuel costs have risen as a result of the Ukraine invasion. Additionally, several airlines —led by Alaska and JetBlue – have had a difficult time ramping up capacity to meet the soaring demand.

European benchmark Brent crude reached nearly $140 a barrel in early March, but has since fallen back to $98.49 per barrel on Monday, its first close under $100 since March 16. U.S. benchmark West Texas Intermediate crude was trading at $99 Tuesday morning, down from around $123 last month. Both are still high. Before the Ukraine invasion, the last time oil prices traded at $100 was 2014. Prices have climbed steeply since 2020, when they averaged about $39 a barrel.

Could this be a time for an airline to try to merge its way out of its problems? JetBlue proposed a merger with Spirit last week, citing a path to adding pilots and aircraft.

In any case, for Delta, “We are forecasting a first quarter loss, but it’s likely to be the last loss for the airline this year, even with higher fuel prices,” wrote Cowen analyst Helane Becker in a note issued Monday. Additionally, Bank of America analyst Andrew Didora wrote, “While investor expectations have increased of late, we think Delta will be bullish on summer demand with airlines a major beneficiary of a shift to services spend.”

Delta closed Monday at $38.21, up about 4% for the day. Year-to-date, shares are down about 5%.

Because it owns a refinery, Delta may have some protection from the rise in fuel costs. The refinery benefit may offset the problem, which Didora noted, that “Gulf coast/west coast jet fuel is in the $3.52/gallon range while New York jet fuel is double the price given a localized supply problem.

“This could hurt those companies with big northeast exposure like JBLU (22% of system flights leave from NY; NY jet exposure is 15%), United in Newark (8% of flights) and Delta at JFK/LaGuardia (8% of flights but refinery is an offset),” he wrote.

Becker said she sees a potential for a positive surprise in Delta earnings. The consensus earnings estimate is minus $1.33. Becker is forecasting a loss of $1.30. “Delta did not sell middle seats on its aircraft until May last year and as such has easier y/y comps,” Becker wrote. “They are likely raising fares to offset higher jet fuel prices, and also benefit from refining margins at their Monroe Refinery business.”

Early Tuesday, American said it expects to report a pre-tax first quarter loss, but with higher revenue than a year earlier.

Meanwhile, Didora’s report is headlined, “Expect upbeat earnings season but not all stocks are the same.” The stocks Didora likes best are Delta, Southwest and Alaska.

“Strong pricing power has emerged as corporate demand returns, leisure travel remains healthy, and capacity is temporarily constrained by labor and fuel,” Didora wrote. “While fuel costs and consumer concerns are issues, we think 2Q22 revenue outlooks have the ability to surprise to the upside based on our bookings data.”