Can Delta Air Lines (DAL) extend its operational runway to emerge more profitable in the quarters ahead? While the Delta is seemingly best-positioned to outperform its peer group in 2022, its performance is strongly dependent on business and international travel.
The company’s growth prospects and liquidity position will be key focus areas when it reports first quarter fiscal 2022 earnings results before the opening bell Wednesday. Airline stocks have lost plenty of altitude over the past several weeks, seemingly caught between two events — war and inflation. Aside from Russia’s invasion of Ukraine, which has threatened the stability of the global jet fuel market — this is important given that fuel costs often make up one-third of airlines’ total expenses — airlines must now face the prospect of higher interest rates. And that’s an ominous prospect given the debt levels they often carry.
In the case of Delta Airlines, which has $24.5 billion in debt, rising rates mean higher payments. While its operating cash flow has improved in recent quarters, so has its debt. The company posted a loss last quarter mostly due to rising fuel costs. What’s more, the added impact has also been the rising cost of jet fuel, which has become far more expensive. In other words, just when it appeared that the airlines were about the recover from the devastation caused by the pandemic, they now must navigate this crisis.
For Delta, which ended 2021 on a positive note, the company desperately needs an increase in travel demand to grow its profits so it can pay down debt. In the meantime, the shares have risen more than 17% over the past thirty days, compared to a 7.6% gain in the S&P 500 index. Delta stock assumes its improved fundamentals will continue. As such, on Wednesday the market will want to see continues fundamental improvements and upbeat guidance before determining the next direction for the stock.
For the three months that ended March, analysts expect Atlanta-based transportation giant to lose $1.36 per share on revenue of $8.78 billion. This compares to the year-ago quarter when the loss came to $3.55 per share on $3.91 billion in revenue. For the full year, ending in December, earnings are projected to be $1.36 per share, compared to a year-ago loss of $4.08 per share, while full-year revenue of $43.63 billion would rise 46% year over year.
Anticipating any increase capacity can help the airline recapture its pre-Covid EPS level of $7 per share. How realistic that figure is, remains to be seen. Delta has beaten consensus earnings estimates in the last three reporting periods. In the fourth quarter, not only did the airline reported a small profit, Q4 revenues of $8.4 billion not only easily beat analyst estimates by almost $200 million, that revenue total marked a pre-pandemic recovery of 74% with capacity improving by 79%.
Delta also noted strong demand in leisure travel, while touting the improvement in corporate travel and holiday bookings during quarter. The strong revenue yielded EPS of 22 cents per share which topped consensus estimates by 7 cents. In terms of liquidity, the company ended the quarter with $14.2 billion in cash and cash equivalents, short-term investments and undrawn revolving credit facilities. The Q4 results suggests that the management is making the best out of a situation that is out of their control.
With the stock trading near yearly lows, while passengers are flying close to full recovery levels, the risk-reward favors the long side. For that to matter, on Wednesday Delta must demonstrate it is better positioned to thrive when travel demand resumes.
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