What happened
Delta Air Lines (DAL -1.77%) beat analyst expectations in the fourth quarter but disappointed on guidance for the coming quarter. Investors apparently were not expecting the turbulence, and they sent shares of Delta down as much as 7.8% on Friday morning.
So what
Airline investors were generally upbeat heading into earnings season. The carriers saw significant demand through the holiday period, and with the exception of Southwest Airlines, the industry largely navigated through a winter storm without incident.
Delta's results reflect the strong travel season. The airline earned $1.48 per share in the fourth quarter on revenue of $13.44 billion, topping expectations for $1.33 per share in earnings on sales of $12.23 billion. For the year, Delta earned $3.20 per share on revenue of $45.6 billion.
"Delta people rose to the challenges of 2022, delivering industry-leading operational reliability and financial performance, and I'm looking forward to recognizing their achievements with over $500 million in profit sharing payments next month," CEO Ed Bastian said in a statement. "As we move into 2023, the industry backdrop for air travel remains favorable and Delta is well positioned to deliver significant earnings and free cash flow growth."
The airline reported operating cash flow of $6.2 billion for the year, ending 2022 with $9.4 billion in liquidity.
Now what
Delta is forecasting revenue growth of 15% to 20% in 2023, but investors are more focused on the expense side. The company said it expects earnings of $0.15 to $0.40 per share in the current quarter, well below the $0.55-per-share consensus.
The issue is costs, particularly the cost of fully incorporating the expenses associated with new labor deals and of rebuilding its network to prepandemic levels prior to the important summer travel season. Delta telegraphed these costs in a December financial update, but this is the first time the airline has included them in its official forecast.
The added expenses are going to hit hard in what has historically been the slowest quarter for airlines, but they should be offset in later months assuming demand remains strong. For the year, Delta is forecasting earnings of between $5 and $6 per share, offering some upside to the $5.07-per-share consensus.
After two years of turbulence, the airlines are slowly regaining their footing, and Delta remains one of the best-run companies in the industry. For long-term-focused investors who can look past what could be a sluggish first-quarter report, the post-earnings drop looks like a buying opportunity.
