Delta Air Lines, Inc. (NYSE:DAL) reported better-than-expected earnings on Wednesday as low fuel prices gave the company a boost, and announced it would be cutting some of its international flights due to a strong dollar.
But the strong earnings report — and the subsequent 2% pop in DAL stock — doesn’t make Delta a good buy at this point.
Delta reported adjusted net income of 45 cents per diluted share, a penny better than analysts were expecting and much higher than the 33 cents the company posted for the same quarter last year.
Operating revenue increased to $9.4 million, representing a 5.3% increase from the year before and falling in line with analysts’ estimates.
Delta’s CEO Richard Anderson said that it was the best-ever March quarter for the company from an operational and financial standpoint.
Though while I am sure management would love to take all the credit, DAL was helped by low oil prices during the quarter. Despite taking a $372 million write-down from its oil hedges in the quarter, the company still believes it will save more than $2 billion in fuel costs during 2015.
The strong dollar is also having an impact on DAL stock. On one hand, a powerful dollar makes oil prices lower. But it also means negative currency headwinds when the company operates overseas.
To help reduce the negative side of the strong dollar, Delta will reduce flights in other countries. DAL plans to cut at least 15% of its service to Japan, Brazil, Africa, India and the Middle East while ending service to Moscow during this winter.
The reductions highlight Delta’s business plan of being more disciplined about routes and the number of flights being offered.
DAL is also continuing to show discipline when it comes to it debt management as the company now sits with adjusted net debt of $7.4 billion — a decrease from more than $17 billion in 2009. With lower debt come lower interest expenses, which have been cut by nearly 50% over the past few years. This allowed the company to return $500 million to shareholders, through both a dividend payment and share repurchases.
DAL shares are up more than 33% in the last year, far outperforming the S&P 500, which is up 13%. But year-to-date DAL is trailing the market by more than 11%. The fall in oil prices certainly helped give Delta’s stock a boost, but more recently without a continued catalyst the stock has faltered.
If DAL can continue to show discipline, shares will certainly rise again in the future, but if oil prices climb the stock will suffer.
Despite the strong performance and positive signs for Delta today, buying DAL or any other airline is like jumping out of a plane without a backup parachute. It’s just not a good idea.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
