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Delta stock falls 9% after earnings miss; sector slumps

Posted: 13 July 2022 4:28 pm
Delta Air Lines plane taking off

Operational disruptions and higher fuel costs hit the airline’s quarterly profit even as travel demand picked up. What investors need to know.

Delta Air Lines (DAL) is the first US airline to post second-quarter earnings this season, and results are mixed.
Revenue for the quarter came in strong compared to 2019 levels, but both revenue and earnings missed Wall Street consensus estimates. Meanwhile, operational margin came in lower than what the company had predicted. Delta blamed operational disruptions and higher fuel prices for the miss.
Delta shares traded lower Wednesday on the news, down as much as 9% after the market opened, and was one of the S&P 500’s biggest laggards for the day.
Likewise, US carriers United Airlines (UAL), American Airlines (AAL) and JetBlue Airways (JBLU) were all down more than 3% at the time of this writing, while shares of Southwest Airlines (LUV), Frontier Group (ULCC) and Spirit Airlines (SAVE) traded down by about 1%. Wednesday’s slump across the airlines comes as inflation data — also released Wednesday — came in higher than expected. The rest of these US airlines are scheduled to report earnings in the coming weeks.
Delta stock is down about 36% from its 52-week high and is stuck at levels not seen since 2020. While travel is picking up, investors may be waiting for Delta and other carriers to show they can restore service and reliability going forward.

What happened?

Delta Air Lines said the company’s second-quarter financials were negatively affected by operational disruptions and higher fuel costs, something the entire airline industry has struggled with over the past few weeks.
Bad weather, employee absences and pilot shortages are just some of the contributing factors to a recent flurry of delays and cancellations throughout the industry. Meanwhile, oil prices returned to heightened levels in the three months ended in June, resulting in higher avaiation fuel costs.
“We had a rough six weeks,” Delta CEO Ed Bastian said in an interview with CNBC on Wednesday. “We’re sorry for our customers, we’ve issued compensation and an appropriate level of apology. That said, we’re going to get back.”
Delta’s adjusted results for the quarter fell short of analyst estimates. The airline reported adjusted earnings of $1.44 on $12.3 billion in revenue, falling short of analysts’ average estimate of $1.64 in earnings on $13.4 billion in revenue, according to Yahoo Finance data.
The miss sent Delta’s shares down more than 9% Wednesday morning before recovering a bit in the afternoon.
Operating margins for the quarter also came in lower than expected at 11.7%. Guidance from the airline’s first-quarter results reported in April called for adjusted operating margins of between 12% and 14%. Jet fuel coming in at $3.82 per gallon pushed the cost of operation higher than Delta expected. The airline said in April that it had anticipated fuel costs for the June quarter to come in between ​​$3.20 and $3.35 per gallon.

Thinking of buying Delta Air Lines stock?

Looking forward, Delta’s revenue guidance for the third quarter is up between 1% and 5% compared to the same quarter of 2019, given the strong summer travel demand it has seen so far this year. Delta said revenue from domestic passengers was 3% higher compared to 2019, before the pandemic, while international passenger revenue was at 81% of prepandemic levels.
The company expects its operating margin to come in between 11% and 13%, as it expects fuel costs to drift lower in the current quarter.
“This quarter’s operational performance has not been up to our industry-leading standards, and restoring operational excellence is our top priority,” Bastian said on an earnings call with investors and analysts Wednesday.
Wall Street estimates Delta will report earnings of $1.53 per share on $13.3 billion in revenue for the current quarter.
So how should investors approach Delta stock given the rising travel demand but higher costs?
Delta expects fuel costs to edge lower this quarter, which would help lower its cost of operation. And this is echoed by the US Energy Information Administration (EIA). The EIA lowered its 2022 oil price outlook on Tuesday, as it expects global inventories to increase in the latter half of the year. Be that as it may, Delta will still need to fix its operational issues to see better results on the bottom line.
Analysts see the stock reaching $52.07 on average over the next 12 months and give it a Strong Buy rating, according to Yahoo Finance.

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At the time of publication, Matt Miczulski did not own shares of any equity mentioned in this story.

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