Delta Air Lines (NYSE:DAL) shares are up more than 20% in the past year, though shares have mostly languished in 2015.
And despite a small bump following its Q2 earnings report Wednesday, investors should be flying right past DAL stock.
First, let’s look at Delta earnings, then we’ll talk about the bigger issues looming over the airline stock.
Delta Earnings
DAL profits of $1.27 per share topped both Wall Street estimates of $1.21 per share, as well as the $1.04 it reported last year for the same quarter. Revenues of $10.71 billion also beat on both fronts — analysts were expecting $10.65 billion in revenues, while Delta reported $10.62 billion in the year-ago period.
Despite beating on both the top and bottom lines, Delta Air Lines reported a drop in passenger unit revenues — a key airline metric because it can indicate pricing power — of 4.6% for the quarter. Delta’s management blamed the drop in passenger-unit revenue to the impact from foreign currency exchange, lower international surcharges and general lower domestic yields.
So … how did DAL and its crummy passenger revenues actually raise its earnings?
A combination of financial engineering and luck.
The luck part of it was Delta enjoying much lower fuel costs in Q2 2015 than the year-ago quarter. DAL reported a 40% decline in fuel expenses (to $1.75 billion) over that time.
The financial engineering part was simply reduced share count. During the most recent quarter alone, DAL spent $925 million on stock buybacks. All told, Delta lopped off 5.7% of its share count year-over-year, going from 841 million to 803 million.
Had DAL reported the same $1 billion in earnings for this most recent quarter and had the same share count it had in the second quarter of 2014, adjusted earnings per share would’ve come in at $1.21 per share — 16% better, not the 22% increase that Delta reported.
When you then consider that Delta achieved 12% cost reductions primarily based on lower fuel charges, you’re actually looking at closer to a 4% increase in earnings.
A better way of saying: DAL’s business didn’t get much better from one year to the next. It’s reliant on share buybacks and low fuel costs.
Delta’s management believes for the remained of 2015 its fuel costs will be around $1.90 – $2.00 per gallon, down much lower than the $2.65 per gallon it has spent during the first six months of the year. SO while DAL will likely again post positive EPS growth for the remainder of 2015, the gravy train will likely stop at the beginning of next year unless oil falls to $30 a barrel — a very unlikely scenario.
DAL stock may continue to move higher for the next few months or even possibly the next year, but anyone gambling on Delta today needs to pay very close attention to the oil markets, as they are the true driver of DAL at this point.
As of this writing, Matt Thalman did not hold positions in any company mentioned above. Follow him on Twitter at @mthalman5513.
