Delta Earnings Preview: Increased Costs To Weigh On Earnings, While Revenues Soar On Improved Demand

Delta Air Lines (NYSE:DAL) is all set to report earnings for Q2 on July 12. So far in the year, the company has managed to post good top line figures. In fact, revenues in Q1 represented the highest sales figure ever recorded in any of the previous March quarters. Additionally, the company saw its strongest revenue momentum since 2014 in the first three months of 2018.

This improvement was only possible thanks to heavy growth across all geographical areas, strong cargo results, and consistent double-digit growth in loyalty revenues. As demand continues to surge, we expect top line to improve consistently through the remainder of the year.

In contrast, despite marginally beating the consensus estimate, the airline’s earnings came in roughly 4% lower than the year ago figure in the first quarter on increased energy, wage, and maintenance expenses. Notably, in Q1, more than a third of the increased costs were a result of sharp rises in oil prices.

Over the last three months, oil prices have risen by about a further $10, or 14%, to $80. Consequently, we expect this to result in a major jump in fuel expenses at the airline this quarter. In anticipation of this trend, in the previous earnings call, management decided to reduce its Q2 earnings guidance for earnings to lie between $1.65-$1.75 per share, significantly down from $1.80-$2.00.

That said, the costs are expected to taper out through the remainder of the year as the company annualizes prior year investments, and gains benefits from their upgauging and One Delta initiatives.

Further, over the long term, we expect maintenance costs to go down significantly as the company looks to renew nearly a quarter of its mainline fleet, or about 216 planes, over the next two years. Older planes, like the MD-88s and MD-90s, have led to mounting maintenance expenses that have plagued Delta’s books for quite some time now. However, this change in strategy will ensure more fuel efficient planes that could cut fuel and maintenance costs over the years.

All in all, it looks like Delta has quite a challenging time in the months ahead. While revenues are expected to move in line with an improved industry trend line, we expect costs to take a toll on profitability going forward. We can expect to learn more on this in the upcoming earnings call.

Since the beginning of the year, the company’s valuation has suffered at the hands of lower profits, and overall uncertainty. Despite this, we believe that the stock is undervalued at the moment. We have created an interactive dashboard analysis to best relay our valuation methods and reasoning.

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