The airline industry hasn't come close to making a full recovery from the COVID-19 pandemic yet. International travel restrictions continue to weigh heavily on long-haul travel, while business-travel demand has just started to bounce back in a meaningful way.

That said, demand is finally improving at a steady pace, led by strong leisure-travel demand within the U.S. and to nearby international destinations (like Mexico and the Caribbean). This nascent recovery enabled Delta Air Lines (NYSE:DAL) to record strong sequential improvement in its financial results last quarter, cruising past its own forecasts -- not to mention analysts' expectations.

A step in the right direction

Delta Air Lines posted adjusted revenue of $6.3 billion for the second quarter. While that was 49% lower than its Q2 2019 revenue, Delta still beat its April forecast of a 50% to 55% decline on that basis, as well as its updated June forecast for a 50% to 52% revenue drop. Moreover, adjusted revenue surged 76%, compared to the first quarter of 2021.

Long-haul international travel continued to drive a disproportionate amount of Delta's revenue declines. Transatlantic passenger revenue plunged 85% from two years ago, while transpacific passenger revenue plummeted 87% over that period. By contrast, domestic revenue fell 45% and Latin America revenue declined 36%. Cargo revenue came in 35% higher than Q2 2019, while loyalty-program revenue slipped just 9%.

A Delta Air Lines plane parked outside a hangar.

Image source: Delta Air Lines.

The improving revenue environment helped Delta comfortably beat its earnings forecast. Last month, CEO Ed Bastian projected that the full-service airline would report an adjusted pre-tax loss between $1 billion and $1.2 billion for the second quarter. Ultimately, its adjusted pre-tax loss totaled $881 million. This translated to an adjusted loss per share of $1.07. The analyst consensus had called for a loss of $1.40 per share.

Under generally accepted accounting principles (GAAP), Delta actually posted a sizable profit of $652 million ($1.02 per share) last quarter. The company booked a $1.5 billion pre-tax benefit from government payroll-support grants in Q2, driving this discrepancy.

Encouraging cash flow trends

Importantly, Delta Air Lines generated $195 million of free cash flow last quarter -- even after backing out $2.5 billion of cash payroll-support grants it received from the federal government. Average daily net cash ticket sales exceeded management's internal forecast for the quarter by 20%.

To be fair, bookings for summer travel tend to drive seasonally strong cash flow in the second quarter. Still, returning to positive free cash flow roughly a year after the pandemic peaked last spring represents an impressive achievement.

Profitability is likely to continue improving rapidly as business travel returns and international borders reopen. Meanwhile, Delta will carefully manage capital spending in the near term.

Earlier this week, it confirmed its plans to buy 29 used Boeing 737-900ERs and lease seven Airbus A350-900s at bargain prices. This will allow the airline to continue restoring its free cash flow over the next couple of years, while also simplifying its fleet and replacing aircraft it retired last year.

A Delta Air Lines Airbus A350 flying over mountainous terrain.

Image source: Delta Air Lines.

Onward and upward

Delta highlighted several other metrics in its earnings report to demonstrate its growing momentum. First, corporate travel volumes doubled from 20% of pre-pandemic levels to 40% of pre-pandemic levels between March and June.

Second, even though Delta is still mainly carrying leisure travelers, demand in its premium cabins is recovering faster than main cabin demand. In short, many leisure travelers have been willing to pay extra for an upgraded experience.

Third, Delta Air Lines' high-margin revenue stream from its credit card partner American Express recently eclipsed pre-pandemic levels. Remuneration from American Express is poised to grow rapidly over the next couple of years, turbocharging Delta's earnings and cash flow recovery.

Fourth, despite growing concern about the COVID-19 delta variant in recent months, booking activity continues to rise. Of course, that could change in the future. Nevertheless, the robustness of the current recovery should give investors increased confidence that Delta Air Lines' results will continue to improve, even if new variants periodically lead to higher COVID-19 case numbers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.