On Thursday, Delta Air Lines (DAL -3.31%) reported a small adjusted profit for the final quarter of 2021. That said, the company lost $395 million before tax under generally accepted accounting principles (GAAP), mainly due to losses on its investments in various airline partners. Additionally, Delta projected that it will post another loss in the first quarter of 2022.
Notwithstanding this near-term turbulence, Delta's management expressed confidence that the airline will earn "a meaningful profit" in 2022. Indeed, the earnings report included several bright spots that bode well for a strong recovery over the next few years.
The pandemic continues to take a toll
Six months ago, Delta Air Lines thought that it had put its pandemic-related losses in the rearview mirror. The company projected that it would be profitable throughout the second half of 2021 and beyond.
Unfortunately, the delta and omicron COVID-19 variants have disrupted the airline's recovery trajectory. While passenger volumes have continued to recover, many large companies have postponed or reversed their return-to-office timelines. That, in turn, has negatively impacted business travel demand, and business travelers typically pay higher average fares than leisure travelers. Costs are rising, too, driven by surging fuel prices and other inflationary pressures.
Delta still managed to post adjusted profits in the third and fourth quarters, but profitability didn't recover as robustly as it might have hoped. For Q4, it reported adjusted pre-tax income of $170 million. Adjusted revenue fell 26% from the fourth quarter of 2019 to $8.4 billion.
Looking ahead to the first quarter, though, Delta expects to fall back into the red. The rapid spread of the omicron variant has caused the demand recovery to pause again in what is typically a seasonally weak quarter. Cost pressures from high fuel prices, operational disruptions, and lower asset utilization will also weigh on the bottom line.
Plenty of reasons for optimism
Despite the downbeat first-quarter outlook, Delta's management continues to expect a sharp recovery starting this spring. Part of that confidence rests on the belief that the current wave of the pandemic may be the last one before COVID-19 transitions to a relatively stable "endemic" state.
But aside from that hope, Delta's earnings report contained several promising details. First, remuneration from credit card partner American Express decisively surpassed pre-pandemic levels last quarter, reaching $1.2 billion: up 11% from two years earlier. That lends credence to the company's projection that the AmEx partnership will generate over $5 billion of high-margin revenue in 2022 and $7 billion by 2024, compared to $4 billion in 2019.
Second, demand for premium seats continues to recover faster than the main cabin for short-haul routes. This is particularly impressive given that business travel still remains depressed relative to leisure travel, and it suggests that Delta's efforts to differentiate its products and earn a sustainable revenue premium are succeeding.
Third, cargo revenue continues to accelerate, jumping 63% in the fourth quarter relative to Q4 2019. Some of this increase may not be sustainable in the long run as supply chains recover from the pandemic, but in the near term, cargo is poised to provide meaningful incremental revenue compared to 2019.
A bargain stock
At its investor day last month, Delta Air Lines set a target of growing adjusted earnings per share (EPS) to more than $7 by 2024 -- in line with its 2019 performance -- on over $50 billion of revenue. The company also aims to restore its balance sheet to investment-grade metrics and generate over $4 billion of annual free cash flow by then.
Obviously, hitting these numbers will depend on the pandemic ending and international borders fully reopening before 2024. Still, the return to revenue and cash flow growth from the AmEx partnership, rising premium cabin demand, and continued growth in cargo revenue all bode well for Delta's ability to achieve (or even exceed) these targets.
Delta shares currently trade for around $40: less than six times the company's 2024 EPS estimate. Considering the airline's potential for further earnings growth beyond 2024 as it progresses toward its long-term fleet simplification goals, Delta Air Lines stock could double if the company hits its targets. That makes it a great bargain stock for long-term value investors.