Delta Air Lines, Inc. (NYSE:DAL) surprised the market by announcing cuts to capacity growth when it delivered second-quarter earnings, and that was music to investors’ ears.
Delta stock took off in early trading thanks to that news and the fact that the market was well-braced for any weakness in results.
DAL marked down its quarterly forecast a little more than a week ago, after all.
But it’s the cuts to capacity growth that have market participants heaving the heaviest sigh of relief. It’s counterintuitive, but low fuel costs have actually hurt airline stocks even as they’ve helped bottom lines. The Delta stock price — along with those of its peers — has been under increasing pressure over fears that ultra-low oil prices would spur a capacity glut.
Sure, it’s always great to take away a competitor’s market share, but not at the expense of prices and margins. Low fuel prices are also starting to cycle against more difficult year-over-year comparisons, and — lest we forget — they are cyclical anyway. As Delta said in announcing capacity cuts, low fuel prices aren’t here forever.
There are other negatives to low fuel costs. They lead to smaller fuel surcharges on international flights, and that puts pressure on Passenger Revenue per Available Seat Mile (PRASM), a critical metric of top-line results. Mix in domestic yield weakness and unfavorable foreign exchange, and this key measure fell 5%.
That’s why shares in DAL and much of the rest of the industry have been underperforming even as their key input cost has come down.
DAL Stock Looks More Stable
For the most recent quarter, DAL earnings came to $1.55 billion, or $2.03 a share, up from $1.49 billion, or $1.83, a year earlier. On an adjusted basis — which is what Wall Street cares about — earnings rose to $1.47 a share from $1.27 a year ago. Analysts on average were looking for adjusted earnings of $1.45 a share, so that’s a solid earnings beat.
Revenue declined 2.4% to $10.45 billion, which missed the Street’s forecast of $10.49 billion. Unfavorable foreign exchange sliced $65 million off the top line. In any case, the market has generally been forgiving of revenue misses.
However, the most salient part of the reports was DAL’s announcement that it would reduce its U.S.-U.K. capacity on its winter schedule because of negative forex from the crumbling of the British pound and general economic anxiety tied to Brexit.
Be that as it may, a better-than-expected quarter doesn’t necessarily make DAL stock — or any other airline name — a buy just yet.
Delta is adjusting its trim in order to remain in level flight. Headwinds are only going to mount in the second half of the year.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
