Delta Reports Strong March Quarter; Airline Stocks are Too Risky for Our Taste

Image Source: Colin Brown

By Brian Nelson, CFA

On April 10, Delta Air Lines (DAL) reported solid results for its quarter ending in March. On an adjusted basis, operating revenue came in at $12.6 billion (up 6%), while adjusted operating income came in at $640 million with an operating margin of 5.1%. Adjusted pre-tax income was $380 million, revealing a pre-tax margin of 3.0%.

Adjusted earnings per share came in at $0.45 per share, while the company hauled in adjusted operating cash flow of $2.5 billion. Free cash flow was a robust $1.4 billion, while its adjusted debt to EBITDAR came in at 2.9x, down modestly from the end of 2023. Return on invested capital was 13.8% on a trailing five-quarter average.

Looking at the company’s financial guidance for the second quarter of 2024, total revenue is expected to increase 5%-7%, while its operating margin is targeted in the range of 14%-15%. Earnings per share is targeted in the range of $2.20-$2.50. For the full year 2024, earnings per share is expected in the range of $6-$7, while free cash flow is targeted in the range of $3-$4 billion. Adjusted debt to EBITDAR is expected in the range of 2x-3x. Management said as much in its press release:

For the March quarter, we delivered record revenue on outstanding operational performance, enabling strong earnings growth.  We anticipate continued strong momentum for our business, and in the June quarter, we expect to deliver record revenue, a mid-teens operating margin and earnings of $2.20 to $2.50 per share.  We remain confident in our full year targets for earnings of $6 to $7 per share and free cash flow of $3 to $4 billion.

Strong demand for travel on Delta is continuing into the June quarter where we expect total revenue growth of 5 to 7 percent compared to the June quarter 2023 on TRASM of flat to down 2 percent.  Within this outlook, all geographic entities are expected to achieve unit revenue approximately flat to last year, except Latin, where we expect a double-digit decline as we lap strong performance and continue to profitably invest in the network.

Delta set a March quarter record in terms of revenue thanks to strong corporate travel demand and a domestic environment that improved. The company’s managed corporate sales advanced 14% in the period, and “recent corporate survey results indicate that 90% of companies expect their travel budgets to increase or stay the same in the June quarter and beyond.” The company noted that domestic unit revenues set a March quarter record, while strength in international travel continued.

ESG Matters

Delta’s 90+page ESG report is full of details. Management notes that safety is its No. 1 priority, but it goes beyond that. The firm treats its employees right and provides a nice profit-sharing program for employees and even “developed a program…to give every Delta employee access to a $1,000 emergency savings account.” Delta has a Chief Sustainability Officer, and the firm is targeting net-zero emissions by 2050. Reducing single-use plastic consumption during flights and improving the fuel efficiency of its fleet are other key goals. New planes will be 20%-30% more fuel efficient. Delta is also active in their communities and commits to contributing 1% of its profits to communities worldwide, “partnering with organizations like American Red Cross, Captain Planet, Junior Achievement and UNCF.”

Concluding Thoughts

Delta’s quarter ending in March was solid, and its full year outlook was encouraging. In general, however, we don’t like airline equities. The extreme ticket price transparency creates an ultra-competitive environment, and overcapacity is always a concern. We view airlines as merely trading vehicles on the health of the global economy and the trajectory of crude oil prices. Delta is operating well, but it will never be able to escape the challenges of its industry, and for those reasons we remain on the sidelines with respect to shares. Shares yield ~0.6% at the time of this writing.