Delta Air Lines Speaks of Industry Fare Pressures

Image Source: Colin Brown

By Brian Nelson, CFA

Delta Air Lines (DAL) reported disappointing second-quarter results on July 11 with both revenue and non-GAAP earnings per share coming in lower than expected. The company put up record June quarter revenue, which reached $15.4 billion on an adjusted operating basis, up 5.4% from the same period a year ago, but the Street was looking for more. Earnings per share of $2.36 also missed the consensus forecast. Though airlines have largely rationalized capacity in recent years, fare pressures are starting to weigh on performance. We maintain our view that airlines are not long-term investments given their leverage to a cyclical economy and volatile jet fuel prices.

Management had the following to say about the second quarter and outlook:

Thanks to the incredible work of our 100,000 people, Delta is delivering industry-leading operational performance and best-in-class service for our customers.  We delivered record June quarter revenue and pre-tax income of $2 billion with a 15 percent operating margin. Our people are the best in the industry, and we are pleased to recognize their efforts with more than $640 million accrued in the first half toward next year’s profit sharing…For the September quarter, we expect a double-digit operating margin and a pre-tax profit of approximately $1.5 billion. With strong first half results and visibility into the second half, we remain confident in our full-year guidance. 

During the second quarter, Delta Air Lines hauled in $2.5 billion in operating cash flow, while free cash flow totaled $1.3 billion in the period. Adjusted debt to EBITDAR (earnings before interest, taxes, depreciation, amortization, and rent) was 2.8x, down from 3x at the end of last year. Return on invested capital was 13.1% in the quarter on an adjusted basis. Looking to its third quarter forecast, Delta Airlines is targeting revenue up 2%-4%, while its operating margin is expected in the range of 11%-13% and earnings per share in the range of $1.70-$2.00 versus $2.05 consensus. For all of 2024, earnings per share is targeted at $6-$7 versus $6.60 consensus, while free cash flow is expected in the range of $3-$4 billion. Its adjusted debt to EBITDAR is targeted in the range of 2-3x. Delta recently upped its dividend 50%, and shares yield ~1.4% at the time of this writing.