Just yesterday, JPMorgan chimed in with a pessimistic 2016 outlook for airlines. And despite the fact that Delta Air Lines (DAL) underscored that concern just this morning by lowering its margin and revenue outlook for the current quarter, DAL stock is up a solid 2% on Wednesday.
The prod for the rally into a headwind of bearish rhetoric was two-fold. First, Delta managed to top earnings estimates, even though revenue fell short of expectations.
Second, the airline also made it clear it wasn’t going to adding significant capacity until the current demand lull is firmly in the past… a partial reversal of prior growth plans.
Pleased to hear that the company wasn’t putting itself in a dangerous position, investors applauded the decision by pushing DAL stock higher, and into what could be considered a solid technical breakout.
Delta Earnings
Last quarter, Delta Air Lines earned $1.74 per share on $11.11 billion in revenue. The pros were only calling for a bottom line of $1.71 per share of Delta stock, though the revenue figure was right in line with expectations of $11.1 billion. Either way, total revenue fell from the year-ago figure of $11.18 billion, and profits per share of Delta stock grew sharply from last year’s operating comparable of $1.20 per share.
In other words, Delta did more with less.
The explanation is simple enough — gasoline, diesel and jet fuel are all considerably lower than where they were a year ago before the commodity rout turned into more than just a little volatility. When all was said and done, between the namesake division and its regional units, the airline only spent $2.1 billion on fuel last quarter … 38% less than it did in its third quarter of 2014. On a per-gallon basis, jet fuel only cost Delta $1.80 last quarter rather than the $2.90 per gallon it paid in Q3 of 2014.
While the fuel savings and subsequent wider margins were compelling, investors still have reason to be concerned above and beyond the possibility that crude oil prices will rebound at some point in time.
Namely, owners of Delta stock may want to take note of the fact that overall revenue declined — and its per-seat revenue declined by 4.9% in spite of the fact that overall fares in the U.S. are near five-year lows. Per-seat revenue is projected to tumble again in the current quarter, too.
It’s a sign that waning demand is doing more harm than cheap fuel is doing good. In that light, holding off on any capacity expansion is the prudent thing to do.
And the carrier understands investors’ concerns. CFO Paul Jacobson explained:
“We continue to benefit from the decline in fuel prices, which provided a $1 billion-plus tailwind this quarter and, at current prices, will drive a $750 million benefit in the December quarter…With volatile fuel prices and revenues under pressure, we are using the current environment to evaluate and prune costs across all parts of the business, including our overhead functions, making sure we’re investing in the right parts of the airline and at levels we can sustain over time.”
The DAL Stock Chart Speaks Volumes
With all of that being said, the Delta earnings report has provided the backdrop and basis for the much bigger story here … the shape and likely future of Delta stock.
The chart isn’t difficult to interpret. Over the course of the first half of 2015, DAL was in a well-framed downtrend. In the meantime, it has snapped out of that bearish funk and into a fairly well-defined uptrend.
Today’s move is especially significant, though, in that it has pushed DAL stock above a known and established technical ceiling at $48.30. This is strong technical evidence that investors finally have faith that Delta is doing it right.
It’s also worth noting that the forward-looking P/E of 8.4 is uncharacteristically low, and even if jet fuel prices do rise next year, Delta shares would still be priced at palatable levels.
For the sake of comparing and contrasting, United Continental Holdings (UAL), American Airlines Group (AAL) and Southwest Airlines (LUV) will all report last quarter’s earnings next week. Their figures and rhetoric may shed even more light on where Delta is, and where it’s going.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
