Since the pandemic hit in 2020, the airline industry has taken a heavy hit. Travel was interrupted and flights were canceled as closures were imposed everywhere. The industry had to bear huge losses. But things started to look up in late 2021 when lockdowns were lifted and travel was allowed again in most places. As summer approaches, airlines hope demand will rise again for domestic and international travel, generating higher revenues and profits.
Delta Airlines (DAL 2.42% ) was the talk of the town after its latest quarterly results on April 13 and provided insight into what the next quarter will look like for the company. Its stock jumped 10% last week and most airline stocks soared after Delta earnings. Let’s see why.
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A good quarter for Delta in troubled times
Although the COVID-19 pandemic is not over, travel demand appears to be increasing. People are more willing to travel, and are even paying a little extra to make their vacation plans successful, after being stuck at home for more than two years now. According to a Deloitte report, global intent to book an international flight jumped to 23% in June 2021.
For the quarter ended March, Delta reported operating revenue of $8.2 billion, a 79% restoration from the same period in 2019. The airline saw total domestic passenger revenue be recovered by 83%, while international passenger revenues recovered by 54% compared to the comparable quarter. in 2019.
Offices also reopened, reviving both domestic business travel, which recovered 50% in the quarter, and international business travel, which recovered 35% from same-quarter levels in 2019. The company recorded operating losses in January and February. But demand rose in March with a 79% recovery in revenue. It turned out to be a profitable month with an operating margin of 10%.
Full of hope for the future
Delta Air Lines also provided a very optimistic outlook for its next quarter. For the next quarter, management expects the revenue recovery to accelerate to 93% to 97% from 2019 levels and total passenger capacity to be around 84%. The airline also estimates the operating profit margin to be between 12% and 14%.
Management believes Delta is more than capable of handling growing consumer demand and the accelerated return to travel, both domestic and international. The company is working on modernizing its fleet, taking delivery of its first A321neos at the end of March, with a total of 26 expected this year. This upgrade aligns with Delta’s goal of using at least 6% less fuel per available seat mile this year compared to 2019. In total, the airline plans to purchase 155 A321neos up to in 2027.
In March, in an open letter, a group of airline CEOs urged President Joe Biden to “end the carry mask mandate and testing requirements for international travelers,” as CNN reported. This initiative was partially approved with the end of the mask mandate but the testing requirements are still in place. This initiative would make travelers more comfortable and stimulate travel demand. Delta’s CEO, along with executives from South West Airlines, American airlines, United Airlines and many others, signed the letter.
Is Delta a good stock to buy now?
The airline saw its adjusted operating expenses rise 11% sequentially to $9 billion in the quarter, due to higher fuel prices. But what’s impressive about Delta is that amidst all the challenges, the company has worked to reduce its debt. In the last quarter, it generated free cash flow of $197 million to pay down some of its debt. At the end of the quarter, it had adjusted net debt of $21 billion, with liquidity of $12.8 billion (which included cash and cash equivalents, short-term investments and credit facilities unused renewables).
Chief Financial Officer Dan Janki said, “Debt reduction is our top financial priority as we target investment-grade metrics and $15 billion in adjusted net debt by the end of 2024.”
Airline stocks might still look a bit risky now with the ongoing pandemic and geopolitical tensions surrounding Russia’s invasion of Ukraine. But once the troubled times are over, demand for air travel will likely return to normal, generating revenue and profits for the airline industry. This in turn could help airline stocks soar. Wall Street has hopes for Delta Air Lines, which is why analysts see 25% upside for the stock over the next 12 months.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.
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