The spike in benchmark oil prices from $70 in early January to $100 at present has weighed on airline stocks including Delta Air Lines (NYSE: DAL). Fuel costs account for a fifth of Delta’s operating expenses and the 50% increase is expected to make a dent on the bottom line in Q1 2022. Delta’s stock has observed a $12.6 billion contraction in market capitalization from pre-pandemic levels despite burning just $529 million of operating cash. Per annual filings, the company does not have significant fuel hedges to shield itself from an oil price surge. Considering an operating loss from high fuel prices for the quarter, investors seem to be too pessimistic on the stock despite strong passenger demand. Our interactive dashboard on Delta Air Lines Earnings Preview highlights the historical trends in revenues, earnings, valuation multiple, and forecast for Q1 2022.
Before the pandemic, Delta Air Lines’ revenues observed an average growth rate of 6% p.a. from $39.4 billion in 2016 to $47 billion in 2019. Sale of air tickets and other ancillary services such as cargo & vacation packages are key offerings by the company. Historically, top line expansion has been assisted by continued capacity growth and rising ticket prices. Moreover, the company’s net margins have remained relatively flat within the 8-10% range with a sizable change in earnings per share as the company re-purchased common stock along-with debt retirals.
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Passenger Demand Remains Strong
Despite concerns of high inflation, supply chain disruptions, and likelihood of macroeconomic uncertainty due to the Russia-Ukraine war, the air travel demand remains strong as highlighted by passenger numbers at TSA checkpoints. Notably, passenger numbers are down by just 5-10% from pre-pandemic levels. On comparing Delta Air Lines’ stock performance to Allegiant Travel Company (NASDAQ: ALGT), which is an air carrier that operates in under-served U.S. cities, investors seem to be optimistic on long-term domestic travel demand.
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