delta airline

Delta Airlines (NYSE: DAL) stock is trading lower in US premarket trading today after its earnings missed street estimates. The company missed analysts’ estimates for the bottom line while its sales were better than expected.

Delta Airlines reported revenues of $13.82 billion in the quarter which was ahead of the $13.57 billion that analysts were expecting. The company’s adjusted revenues were 99% of the pre-pandemic period. Notably, the COVID-19 pandemic was an almost death kneel for the global aviation industry.

As airlines were forced to ground their fleet amid the lockdowns their revenues dried up. However, they still had cost to pay like interest payments and employee salaries. The US government bailed out the aviation industry in what was the worst crisis for the industry in history.

Notably, while demand from individual customers had rebounded, corporate travel was the weak link for airline companies. In its earnings release, Delta Airlines said that corporate travel is also recovering and in the second quarter it rose 25 percentage points as compared to the first quarter. The run rate is now 80% of the pre-COVID levels.

Also, while Delta Airlines had an 18% lower capacity in the second quarter, its total revenues were 10% higher than the corresponding quarter in 2019. While the rise is also due to higher fuel costs, it also reflects the firm pricing in the industry.

Meanwhile, while Delta Airlines posted better than expected sales, its adjusted EPS of $1.44 fell short of the $1.73 that analysts were expecting.

Delta Airlines Posted Strong Cash Flows in the First Half

Commenting on the earnings, Ed Bastion, Delta Airlines’ CEO said, “I would like to thank our entire team for their outstanding work during a challenging operating environment for the industry as we work to restore our best-in-class reliability. Their performance coupled with strong demand drove nearly $2 billion of free cash flow as well as profitability in the first half of the year, and we are accruing profit sharing, marking a great milestone for our people.”

The market opinion towards aviation stocks is mixed. While some analysts find airline stocks cheap, others see them as a risky proposition considering the recession fears. The demand for airline companies dips during a recession as people cut down on leisure during periods of economic turmoil. However, air travel is holding up well despite high travel costs.

Warren Buffett, who is otherwise known for making sound investments, incurred billions of dollars in losses as he sold all four US airlines that he was holding. The list also included Delta Airlines. Buffett sold the shares in April 2020 after the stocks had already crashed.

Delta Provided Guidance for the Third Quarter

Delta Airlines also provided guidance for the third quarter and said that it expects operating margins between 11-13% which would put it on a path to full-year profitability in 2022. It expects its revenues to rise 1-5% as compared to the corresponding period in 2019 while predicting a capacity between 83-85%. The company expects to have a net debt of $20 billion in the quarter.

Aviation companies have added a lot of debt since 2020 as they raised cash to survive the slump. The debt would eventually need to be repaid or refinanced. In the second quarter also, Delta Airlines repaid $1 billion in debt on a gross basis.

Delta Airlines is also working to improve its reliability. Airline companies globally have been battling labor shortages which have resulted in delays and cancelations.

Delta Airlines stock is trading almost 3% lower in premarkets today. The stock is down 20% this year. Growth stocks like Peloton are among the worst performers in 2022 and Peloton hit its all-time lows earlier in the year. Peloton stock bounced back yesterday after the company announced that it would exit its manufacturing operations and would totally shift to third-party production.

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