Ever since the pandemic hit in 2020, the airline industry has taken a huge blow. Travel halted and flights were canceled as lockdowns were imposed everywhere. The industry had to bear huge losses. But things started improving in late 2021 when lockdowns were lifted and traveling was allowed again in most places. With the summer approaching, airlines are hopeful demand will rise again for domestic and international travel, bringing in higher revenues and profits.
Delta Air Lines (DAL -1.85%) was the talk of the town after its most recent quarterly earnings earnings on April 13 and gave a hint of what the next quarter looks like for the company. Its stock jumped 10% last week, and most airline stocks soared following Delta's earnings. Let's take a look at why.
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A good quarter for Delta amid the troubled times
Though the COVID-19 pandemic isn't over, travel demand seems to be rising. People are more keen to travel, and even pay a little extra for their vacation plans to be successful, after being stuck at home for more than two years now. According to a Deloitte report, global intent to book an international flight climbed to 23% by June 2021.
For the quarter ended March, Delta reported operating revenue of $8.2 billion, which was 79% restored from the same period in 2019. The airline saw total domestic passenger revenue to be 83% recovered, while international passenger revenue recovered 54% versus the comparable quarter in 2019.
Offices also reopened, reviving both domestic corporate travel, which recovered 50% in the quarter, and international corporate travel, which recovered 35% versus 2019's same quarter levels. The company recorded operating losses in January and February. But demand rose in March with a revenue recovery of 79%. It turned out to be a profitable month with an operating profit margin of 10%.
Hopeful for the future
Delta Air Lines also provided a very hopeful outlook for its next quarter. For the upcoming quarter, management expects revenue recovery to accelerate 93% to 97% from 2019 levels and total passenger capacity to be around 84%. The airline also sees operating profit margin to be in the range of 12% to 14%.
Management believes Delta is more than capable in handling the rising consumer demand and the accelerating return of travel, both domestic and international. The company is working on upgrading its fleet, by taking delivery of its first A321neo aircraft at the end of March, with a total of 26 expected this year. This upgrade aligns with Delta's objective of using at least 6% less fuel per available seat mile this year compared with 2019. In total the airline plans to purchase 155 A321neos through 2027.
In March, in an open letter, a group of airline CEOs urged President Joe Biden to "end the transportation mask mandate and testing requirements for international travelers," as CNN reported.This initiative has been partially approved with the end of the mask mandate but testing requirements are still on. This initiative would make travelers more comfortable and boost travel demand. Delta's CEO, along with executives from Southwest Airlines, American Airlines, United Airlines and many others, signed the letter.
Is Delta a good stock to buy now?
The airline saw its adjusted operating expense rise by 11% sequentially to $9 billion in the quarter driven by higher fuel prices. But what's impressive about Delta is amid all the challenges, the company worked on reducing its debt. During the most recent quarter, it generated free cash flow of $197 million to pay off some of its debt. At the end of the quarter, it had adjusted net debt of $21 billion, with $12.8 billion in liquidity (that included cash and cash equivalents, short-term investments, and undrawn revolving credit facilities).
CFO Dan Janki stated, "Reducing debt is our top financial priority as we target investment-grade metrics and $15 billion of adjusted net debt by the end of 2024."
Airline stocks still might look a bit risky now with the ongoing pandemic and geopolitical tensions surrounding Russia's invasion of Ukraine. But once troubled times ends, air travel demand will likely return to normal, driving revenue and profits for the airline industry. This could in turn help airline stocks skyrocket. Wall Street has hopes for Delta Air Lines, which is why analysts see upsides of 25% for the stock in the next 12 months.
