Airlines got off to a shaky start in 2022, due to the omicron wave of the COVID-19 pandemic. However, demand has come roaring back since the middle of February, offsetting the impact of soaring fuel prices.
As a result, industry leader Delta Air Lines (DAL 0.79%) expects to post a big profit in the second quarter. Moreover, the airline giant remains on track to grow its earnings to record levels within a couple of years. Let's take a look.
A big inflection in demand
Three months ago, Delta projected that first-quarter revenue would be down between 24% and 28%, compared to Q1 2019, on 15% to 17% less capacity. Ultimately, the carrier decreased capacity by 17%, but adjusted operating revenue reached $8.2 billion, down just 21% from three years earlier.
In other words, revenue beat the midpoint of Delta's quarterly guidance by 5 percentage points. That highlights the robustness of the demand recovery as the omicron wave faded.
During Delta's earnings call, management reeled off numerous impressive statistics to emphasize the strength of demand today. According to company president Glen Hauenstein:
March was the first month in two years of positive unit revenue compared to 2019. ... Premium products once again led the way with domestic premium revenue approximately 100% restored to March of 2019 levels. We also achieved our highest ever monthly cash sales ... our highest direct sales, highest co-brand acquisitions, highest co-brand spend, and highest cargo revenue in the month of March.
In short, while business travel hasn't fully recovered yet, strong demand for premium leisure travel, the ongoing cargo boom, and record performance from Delta's credit card partnership with American Express are making up for it.
A recipe for strong profitability
For the first quarter, Delta reported an adjusted pre-tax loss of $1 billion and an adjusted loss per share of $1.23. However, by the month of March, Delta was solidly profitable, logging an adjusted operating margin of nearly 10%.
That's setting Delta up for a strong second quarter, despite jet fuel prices reaching levels not seen in nearly a decade. Management currently expects revenue to decrease just 3% to 7% this quarter, compared to the second quarter of 2019, despite operating at 16% less capacity. That forecast implies a double-digit jump in unit revenue.
Based on this strong revenue outlook, Delta Air Lines anticipates achieving a Q2 operating margin between 12% and 14%. That would still lag Delta's Q2 2019 operating margin of 17%. However, getting to double-digit territory would be an impressive feat, given that fuel prices are far above 2019 levels, business travel is still in recovery mode, many international travel restrictions remain in place, and non-fuel unit costs remain elevated because Delta hasn't fully restored capacity to pre-pandemic levels.
Cleared for takeoff
Looking ahead, assuming demand remains strong enough to cover elevated fuel costs, Delta Air Lines expects to continue restoring capacity toward pre-pandemic levels. That will reduce non-fuel unit costs, bolstering the airline's profitability.
In the second half of 2022 alone, management expects non-fuel unit cost inflation (relative to 2019) to moderate to mid-single-digit territory. That compares to a 15% increase last quarter and an anticipated 17% increase in Q2.
Additionally, remuneration from the American Express partnership reached $1.2 billion last quarter, up 25% from Q1 2019. That bodes well for Delta's goal of growing the high-margin AmEx revenue stream to over $5 billion this year and $7 billion by 2024.
With non-fuel unit costs normalizing, improving fuel efficiency partially offsetting higher fuel prices, strong passenger revenue trends, and growing ancillary revenue streams, Delta is poised for a rapid earnings recovery. Indeed, it has a good chance to surpass its prior full-year record earnings per share of $7.31 by 2024. That makes Delta Air Lines stock look extremely attractive based on its Thursday closing price of $42.36.