Delta Air Lines (DAL -1.65%) got airline earnings season off to a positive start, and took most of the rest of the industry along for the ride. Shares of Delta traded up 14.5% for the week as of Thursday afternoon trading, with shares of United Airlines Holdings (UAL -1.42%), Southwest Airlines (LUV -0.81%), American Airlines Group (AAL -1.23%), Alaska Air Group (ALK -1.70%), and Hawaiian Holdings (HA -6.45%) all up 8% or more.
The airline industry has been flying through turbulence for much of the last few years. The pandemic dealt a severe blow to the industry, dramatically shrinking demand for travel, and airlines in the months since have experienced an uneven recovery as new coronavirus variants popped up and business travelers continued to work from home.
The war in Ukraine has added a new twist, causing oil prices to spike higher. Jet fuel costs account for upward of 30% of airline operating expenses, leading to worries that an anticipated strong summer travel season might not be as lucrative as investors had hoped.
Those concerns remain valid, but Delta in its first-quarter earnings report went a long way toward convincing airline investors that the sky is not falling. Delta, as expected, lost money in the first three months of 2022, but the loss came in less than expected. And the airline said demand heading into the summer months remains strong.
Delta said it expects second-quarter capacity to be at about 85% of what the airline flew prior to the pandemic, and total revenue to come within 97% of the second quarter of 2019. Demand is strong enough for airlines to use pricing to offset higher fuel prices at least partially. Delta said that even with higher fuel expenses the airline expects to generate a margin of 12% to 14% in the quarter.
Though most of the industry does not report earnings until next week, the picture Delta laid out should be good news for all U.S. airlines. Delta said it remains "confident" it will be profitable in 2022.
Delta provided good news, but investors should be careful not to get ahead of themselves in bidding up the entire sector. For one, while the macroeconomic challenges impact all carriers, some are better able to deal with the challenges than others. Delta has been a top performer for some time now, and heading into earnings season was expected to manage through a difficult quarter relatively easily.
Even if the industry is handling the current challenges, there are still other obstacles on the path to a recovery. Last week, several airlines announced plans to trim flights in response to pilot shortages. And the pandemic remains a worry, as evidenced by a U.S. government decision this week to extend a requirement that masks be worn while on airplanes and other forms of public transportation.
Add it all up, and there is good reason for investors to be cautious here and not chase a rally. At best, the recovery is a multiyear process. There's no reason to think you need to rush to avoid missing out on this flight higher.