Does optimism pay? Sure, especially when pessimism is riding high.
Two years ago, Delta Air Lines
This week, the carrier reported a 14% increase in revenue and reversed last year's losses, posting $0.19 in earnings per share for the December quarter. That's both good and bad news. While a profit definitely beats a loss, analysts were expecting $0.24 per share in profit.
Yet there's definite reason for optimism. Passenger revenue per available seat mile (PRASM) rose 9%, while total operating cost per seat mile (CASM) rose 2%. (Here's the skinny on airline operating metrics.) The implication? Management is finding leverage in the business model, which should continue to yield profits over time. Increased efficiency has also manifested in big gains in returns on capital, which soared from 0.3% in 2009 to 9.9% over the past year.
Not that the bears have learned anything. Shares of Delta are down more than 8% over the past week and more than 1% today. Investors don't believe there's much upside from current levels, apparently. Expectations for higher fuel prices appear to be dampening enthusiasm for the stock. Management's cautious optimism could also be taking a toll.
"Industrywide fare increases, combined with growth in Delta's ancillary products and services, will provide a more long-term, revenue-based solution to addressing the high fuel environment," said Ed Bastian, Delta's president, in a press release.
Here, "ancillary products and services" probably refers to baggage and other service fees as much as in-cabin premium food and entertainment sales. But add-ons can only do much. Cost-cutting will remain important for the foreseeable future. For example, in a call with analysts, CEO Richard Anderson expressed interest in new, more efficient engine technology from Airbus and Bombardier.
"A 20% [improvement in] fuel efficiency at $95 a barrel for fuel is a very important development," Anderson said, raising questions about the company's commitment to Boeing
Delta is also joining AMR
Add it up, and you've got an airline trying to convince investors that it's capable of outmaneuvering the economic forces conspiring to drive fuel prices higher. Should you buy it? History says no, and I'm not one to argue.
Now it's your turn to weigh in. Would you bet on the carriers or the travel agents in this fight? Use the comments section below to explain your thinking. You can also rate Delta Air Lines in Motley Fool CAPS.
Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy has neither given nor received a nice Hawaiian Punch.