A year ago, most investors believed that global network airlines like Delta Air Lines (DAL 1.59%) would face a long slog to return to profitability after the COVID-19 pandemic. Many thought that their profitability would never return to the heights achieved in 2019.
At a recent investor conference, CEO Ed Bastian painted a far more optimistic picture of Delta's recovery progress and medium-term prospects. In fact, he argued that the company could be posting record profits by 2023.
Recovery momentum continues
In conjunction with the conference presentation, Delta Air Lines bumped up its second-quarter guidance. The airline now expects to generate adjusted revenue of $6 billion to $6.2 billion: near the high end of its previous forecast for revenue to decline 50% to 55% from Q2 2019's level.
On the cost side, the carrier is facing pressure from rising fuel prices and a one-time bonus it awarded to employees in honor of Delta receiving the J.D. Power Award for highest customer satisfaction among North American airlines. Nevertheless, the company projects that its quarterly adjusted pre-tax loss will come in between $1 billion and $1.2 billion: near the favorable end of its initial guidance range.
More promisingly, Delta is on track to record an adjusted pre-tax profit for the month of June. Bastian also expects the company to be profitable on a pre-tax basis in the second half of 2021.
Finally, thanks to the growing momentum in bookings, Delta Air Lines' cash inflows have been exceeding the company's initial forecast by about 25% since last month. That has positioned the airline to reduce its net debt more than previously projected this quarter.
Great signs for the future
During his presentation, Bastian highlighted several data points that bode well for Delta's future profitability.
First, the full-service airline continues to expect non-fuel unit costs to fall below 2019 levels by Q4 2021, even with capacity still down about 15% from 2019 in that quarter. Delta is reaping big savings from its aggressive fleet simplification efforts during the pandemic. (Delta will benefit from this tailwind for many years to come as it continues to upgrade and simplify its fleet.) The company also significantly reduced its headcount last year, including permanent reductions at the management level.
Second, Bastian noted that premium seat demand has recovered faster than the main cabin, even though business travel volumes remain minimal. This bucked a widespread belief that leisure travelers just want the lowest fare. Even if business travel demand never returns all the way to pre-pandemic levels, the growing willingness of leisure travelers to pay for upgraded experiences should enable Delta to grow unit revenue back to 2019 levels or better.
Third, spending on Delta's co-branded credit cards now exceeds 2019 levels, even though travel has typically represented a big proportion of spending. As a result, Bastian remains optimistic that Delta Air Lines will hit its target of nearly $7 billion of annual proceeds from credit card partner American Express by 2023: up from $4.1 billion in 2019.
A recipe for higher earnings
As Delta returns to pre-pandemic capacity levels and continues modernizing its fleet over the next couple of years, unit costs should decline further. Meanwhile, management expects Delta's revenue to make a full recovery by 2023.
The combination of equal or higher revenue and lower unit costs implies that Delta would emerge from the pandemic with a higher pre-tax margin and higher earnings than it boasted in 2019. The company also expects to get its debt back to pre-pandemic levels by 2023.
Delta Air Lines stock recently traded for about $47 per share: just 6.4 times the company's 2019 adjusted earnings per share of $7.31. With the airline giant on track to repair its balance sheet and generate even higher earnings by 2023, Delta looks like a compelling bargain for long-term investors.