Delta Air Lines, Inc. (NYSE:DAL) was the latest major airline to put a damper on investors’ summer flying season after DAL stock tumbled on a cut to its outlook.
Low fuel prices are both a blessing and a curse for the airline industry, and DAL shows why. The company lowered its outlook for operating margin for the June quarter on costs related to fuel.
Fuel costs, while still low by historical standards, were higher than DAL had previously forecast. They’re also cycling against increasingly tougher year-over-year comparison. The airline said taxes, hedging and its refinery operations also weighed on results.
Additionally, lower fuel costs 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%.
As a result, DAL had to take down its forecast for second-quarter operating margin to 17% from a previous forecast of 21% to 23%. Delta stock fell sharply on the news.
DAL Stock Is Grounded
Declining PRASM is an industry-wide problem and helps fuel investor worries that overcapacity could once again upend airlines’ profitability. They’re right to worry.
The International Air Transport Association (IATA) expects traffic to grow 6.2%. Unfortunately for investors, the trade group projects capacity to expand 6.8%.
And that’s just one of many headwinds stocks in this sector face. The global economy was a mixed-to-poor picture even before the Brexit crisis came to the fore. Weak growth and a rising dollar don’t paint a reassuring macroeconomic picture for investors in DAL stock or other sector names.
Additionally, the spread of the Zika virus and heightened terrorist activity don’t bode well for sentiment, to say nothing of traffic volume.
Add it all up and Delta stock is off 30% for the year-to-date. United Continental Holdings Inc (NYSE:UAL), American Airlines Group Inc (NASDAQ:AAL) and JetBlue Airways Corporation (NASDAQ:JBLU) are likewise down around 30%. Southwest Airlines Co (NYSE:LUV) is the best of the bunch with a loss of 9% so far this year.
DAL stock recently bounced off a 52-week low but is still trading around levels last seen in October 2014. It’s also the case that there are no catalysts in sight. If anything, we can expect more weakness in unit revenue all summer long.
Delta stock offers a significant discount to its own five-year average on a forward earnings basis, but then, the market hasn’t had to bake in as much uncertainty as exists now.
There’s really no compelling reason to jump on board with DAL stock right now.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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