Today Delta Air Lines (NYSE: DAL) reported strong passenger demand and continued profitability in Q2, despite operational hurdles and soaring costs.
Unfortunately, reported earnings missed analyst consensus estimates. EPS of $1.44 was 16.6% below the FactSet consensus of $1.73.
Sales of $12.311bn grew 31.7% Q/Q but missed FactSet estimates of $12.372bn.
The DAL share price is down 7.4% in early market trading after climbing 6.15% in yesterday's session.
What is Delta Air Lines?
Delta Air Lines Inc (NYSE: DAL) is a United States passenger and cargo airline. It also operates an oil refinery division generating jet fuel and non-jet fuel products.
The company was founded by Collett Everman Woolman in 1928 and is one of the world's oldest operating airlines. Delta is headquartered in Atlanta, Georgia.
Recent Company News
June saw severe disruption to travel markets, with Delta facing flight cancellations, delays and a spate of refunds. Thankfully things have normalized, and the first half of July has resumed a stable pace, with flights at a 99.2% completion rate.
Compared with Q2 2019, Delta's domestic passenger revenue rose 3%, while international passenger revenue was up 81%. The company is also seeing growing demand for business travel.
While owning its oil refinery gives Delta an additional income stream, the company still faces soaring energy costs to fuel its flights.
Delta’s fuel costs rose 41% from 2019 to $3.2bn. In Q2, fuel costs reached $3.82 per gallon, slightly below rival American Airlines' $4 to $4.05 projections.
A shortage of pilots is also putting pressure on airlines to raise pilot wages.
Ed Bastian, Delta's CEO, said:
Our pilots at Delta are the best paid in the industry and they will continue to be. This is not about a wage fight, this is about ensuring that our pilots continue to be well compensated for the great job they do.
How Does Delta Air Lines Make Money?
Delta Air Lines makes money from passenger ticket sales, cargo transportation fees, and additional sources such as its American Express co-branded credit card. It also sells refined jet fuel and non-jet fuel products.
Delta recently raised its flight prices to compensate for the soaring fuel costs. This doesn't appear to have been a problem, with passengers desperate to get away prepared to pay the higher prices.
The company brought in $269m in refinery operating income during Q2. This resulted in a 31¢ per gallon benefit to its adjusted fuel price per gallon.
DAL Stock Financials
DAL stock has a price-to-earnings ratio (P/E) of 39, with a forward P/E of 7, compared to the industry average of 0.4. Its price-to-book value (P/BV) is 6.8, significantly higher than the industry average of 2. Delta no longer offers a shareholder dividend.
Delta Air Lines achieved profitability in the first six months of 2022 and nearly $2bn of free cash flow.
Dan Janki, Delta's CFO, said:
In the June quarter, we repaid $1 billion of gross debt after delivering strong profitability and generating free cash flow ahead of our expectations.
We remain committed to achieving investment-grade metrics and a return on invested capital in the mid-teens over the next 3 years.
DAL Growth Potential
For the full year 2022, Delta Air Lines expects meaningful profitability. In Q3, the company anticipates another profitable quarter and an adjusted operating margin of 11% to 13%. It also sees capacity returning to between 83% and 85% of 2019 levels.
The company is on track to achieve its 2024 targets of over $7 adjusted EPS and $4bn free cash flow.
Delta Air Lines reiterated its forecast for full-year profitability.
DAL Stock Risks
The biggest threat to Delta Airlines' business is soaring fuel prices and recession. If people can't afford to travel, demand could fall. While the CEO sees fuel prices falling and crack spreads reducing, this may not be the reality.
No one knows what will happen with the oil price. Much depends on the war in Ukraine, emerging markets and geopolitical motivations. Therefore, the unknown future oil price adds an element of risk to investing in airline stocks such as DAL.
Should You Invest in Delta Air Lines?
Delta is one of the most robust airlines in America and the first to return to profitability since COVID-19 hit. This boosts its investment case. However, the key to a good investment is if it can go from strength to strength.
The CEO is convinced of the company's resilience and believes travel demand is at the start of a prolonged comeback. Considering the company has resumed its prior level of revenue generation without returning to total capacity, it appears to be in a healthy position.
Nevertheless, Delta Air Lines financial metrics give the impression of an overvalued stock. In the current circumstances, this adds another layer of risk to investing in DAL. If you feel confident that the oil price will stabilize and demand for air travel continue to thrive, Delta may prove to be a good investment in the years to come.
A dividend would ease the pain of patiently holding the shares through a rough patch, but the lack of a dividend makes DAL stock less compelling.