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Why Delta Air Lines, Inc.'s Solid Earnings Report Led to Only a 2% Pop

By Motley Fool Staff - Apr 27, 2016 at 9:46AM

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A look at the airline industry, why the market still doesn’t trust it -- and why, for once, perhaps it should.

Delta Airlines (DAL 3.43%) delivered a higher-than-expected first-quarter profit, along with plans for share buybacks. Yet the big carrier's stock price barely rose in response.

In this segment from the MarketFoolery podcast, Chris Hill talks to Jeff Fischer and JP Bennett about a few areas Delta and the other big airlines still need to work on, how they've changed their game for the better in the past decade or so, and why, just maybe, investors should give them the benefit of the doubt this time around.

A full transcript follows the video.

This podcast was recorded on April 14, 2016. 

Chris Hill: Let's start with Delta Airlines. First-quarter profits came in higher than expected. They're buying back stock. I feel like this is the type of quarter, and this is the type of results and what we're hearing from management, Jeff, that if we weren't talking about the airline industry, the stock would be up more than 2% today.

Jeff Fischer: The airlines right now, Chris, are kind of living a Shangri-La moment. Their profits are so inflated by low fuel costs, and for better or worse, they're spending the windfall.

Hill: Because, we don't know when this is going to happen again.

Fischer: [laughs] Yeah. The better category, a lot of airlines -- and there are only a small handful of major airline companies in the country right now, and the world, which is a good thing for the industry -- but the majors are buying new airplanes, scheduling that out years ahead of time. They're increasing pay, and Delta and American (AAL 5.16%) have moved to profit sharing as well. So employees are benefiting. But while these costs are going up, airfare is holding steady or even going down a bit. So revenue per passenger mile is down. It was down 5% this quarter, and it's been down the past many quarters. So there's a lot of good here, but a lot that has Wall Street concerned, and that's keeping these stocks really, really cheap still.

Hill: Is it really just all about the gas prices? I get that that has a beneficial effect, not just for Delta, but for all of these airlines.

Fischer: Well, which, Delta, earnings were up 27% this quarter to about $950 million, and about $700 million of that was from fuel savings.

Hill: [laughs]

Fischer: So a huge amount is thanks to fuel.

Hill: OK, so "yes" is the answer to that.

Fischer: Yes.

Hill: It's basically all about the fuel. But, haven't -- and, JP, you're significantly younger than Jeff and I -- but in my lifetime, I feel like the airlines have gotten more efficient. I get the gas price. I understand why that matters a great deal. But I also feel like they're just more efficient, because I don't even remember the last time I was on a plane that wasn't, if not completely filled, 95% filled.

JP Bennett: Yeah, I can't really remember -- except, maybe a couple red-eyes, where you're flying and it's like, "Oh, I can move to whatever seat I want." It seems like they're doing a much better job of maxing out that capacity whenever they get the chance to do so.

Fischer: That is true. And Chris and I were talking before the show about the late '90s, even early in the millennium where you'd have a whole row to yourself no matter where you flew. I flew from here in D.C. to Chicago many times back and forth, where the plane was maybe a third full.

Hill: Right.

Fischer: You could feel it was easier to take off, it's like, "Oh, and we're up in the air! We're so light!" But probably the best thing Delta's CEO said is that, if they don't start making more money, more revenue per passenger mile, then they will make adjustments to their fall capacity levels, meaning they'll bring capacity down a little bit. I think that's why American is up today, and Delta as well. The airlines, they were using their proceeds to go after market share, add new routes and whatnot, but there's been a little bit more capacity added, perhaps, than is needed. And that'll probably dial back down, especially once fuel costs go up again.

Hill: I completely understand the trepidation on Wall Street about the airlines as an industry. But one of the pieces of the story last week, with Alaska Air buying Virgin America, was the fact that you had Richard Branson talking about how tough it is for start-up airlines to get gates. And at the end of the day, for all of its flaws, this is an industry with an incredibly high barrier to entry.

Fischer: And incredibly high costs, too. The gates are expensive. Exactly. Getting the routes that are profitable is extremely difficult. And that's why all this consolidation has happened, too, and that's been a good thing for the industry, and that's what has me still believing that -- 

Bennett: [laughs]

Fischer: JP is laughing, and maybe rightly so. Usually I'm a skeptic. But in this case, I believe the airlines have learned, and there's few enough of them now that they can maintain profits. Now, they might be very slim profits when the economy turns or fuel prices go up, when the economy turns weaker.

Hill: Are you saying the magic four words? Are you saying, "This time it's different?"

Bennett: Yes, he is saying that.

Fischer: It may not be indefinite, but it is at least for a time period. Like, they learned the lessons of the past with the most recent bankruptcies. So for the next handful of years, at least, things will be profitable. Now, they might forget those lessons and make the same mistakes again, cycle through again, but hopefully not for a long time.

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Stocks Mentioned

Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$42.23 (3.43%) $1.40
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$18.13 (5.16%) $0.89

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