Delta Air Lines' (DAL -0.43%) latest earnings went a long way to firming up the case for a multi-year recovery in the commercial aviation sector. Despite the difficulties of dealing with the outbreak of the omicron variant in the quarter and higher-than-expected fuel prices, Delta easily beat its guidance for revenue in the quarter. Moreover, the airline finished the quarter on a powerful note and guided toward an excellent second quarter. Here are five reasons why it's great news for the aviation sector.
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Excellent momentum through the quarter
Having been negatively impacted in January and February by the omicron variant -- Delta generated losses in both months -- the airline made a solid comeback to profitability and cash flow in March. As CEO Ed Bastian noted on the earnings call, "With the rebound in demand, the month of March was the best cash sales month in Delta's history, outpacing our prior record from spring of 2019 despite offering 10% fewer seats."
Bastian's commentary is borne out when comparing performance in the quarter compared to initial guidance. For example, management started the quarter planning for capacity to be 83%-85% of the level of the first quarter of 2019 and revenue to be 72%-76% on the same basis. However, in response to omicron, management held back capacity expansion to the lower end of the range at 83%. Still, revenue came in at a whopping 79% -- significantly above the high end of the range.
All told, it's clear Delta ended the quarter a lot stronger than how it entered it.
Overcoming fuel price rises
It's no secret that raw material prices surged during the quarter, which spilled over into higher-than-expected fuel prices. For example, management started the quarter expecting a fuel price of $2.35-$2.50 per gallon in the quarter, only to see it come in at $2.79 per gallon. High fuel prices are bad news for airlines, because they squeeze profit margins. In addition, if airlines respond by raising prices, it can serve to destroy demand.
That said, Delta's President Glen Hauenstein gave a positive outlook on the matter, saying, "In the June quarter, we are successfully recapturing higher fuel prices and expect our revenue recovery to accelerate to 93 to 97 percent with unit revenue up double digits compared to 2019."
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When asked about the issue of pricing strategy on the earnings call, Hauenstein noted that Delta was taking the opportunity "to improve the offer in the marketplace and see if consumers respond to that." Given the strength of demand in March, it looks likely that Delta has been able to pass on higher pricing, and the second-quarter guidance for operating margin of 12%-14% suggests that will continue into the second quarter.
A strong summer coming up
Expanding the guidance and commentary on the second quarter, it's clear Delta is preparing for a strong quarter. The company's guidance calls for revenue of 93%-97% of the same period in 2019, even though capacity is only forecast to be 84% of the same period.
The most exciting development behind the headline figures is probably that business travelers are back. Hauenstein said business travel volumes "reached the highest post-pandemic levels we've seen," and recent surveys "show that 90% of our corporate accounts anticipate travel volumes to increase in the June quarter." That's a bullish sign for the industry, as business travelers tend to be more profitable for airlines.
All told, Delta is expecting the strong momentum generated in March to carry on through the summer.
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Time to buy aviation stocks
While there's no telling how the aviation industry will perform in the third quarter, retail and business travelers are willing to travel given an easing of restrictions. That's a significant plus, and suggests that the industry should remain in recovery mode through 2022 and beyond as long as the economy holds up.
Based on Delta's earnings, it's time to look at investing in the aerospace sector.
