Summer Demand Will Be Key To Delta’s Earnings

The first airline to report earnings for the first quarter will be Delta Air Lines (DAL) on Thursday, which will kick off earnings season in the airline industry.

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Investors will be looking for guidance on how bookings are holding up during the key summer months, as the strength of demand over these months will be crucial.

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In the upcoming days, the company is certainly going to be in the spotlight for its earnings report before the opening of business, and given that its peers can hardly wait until after the close of the month to report, the results and guidance will likely make a huge difference to market sentiment.

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The FactSet estimates of Delta's earnings per share are that the airline will report adjusted earnings per share of 30 cents on sales of $11.97 billion during the first three months of the year. In a note ahead of Delta's earnings release, Cowen analyst Helane Becker stated, "Our adjusted earnings per share estimate is slightly below consensus, resulting in a negative surprise.

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But attention is likely to be on airlines’ prospects for the second quarter and beyond. “We expect management to echo its comments from mid-March that demand for the second quarter and third quarter remains strong and that it is still able to offset higher costs through yields,” Becker added. She has an Outperform rating on the stock. 

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Analysts covering the stock also see positive second and third quarters for Delta, with EPS estimates suggesting double-digit increases in the same quarter in 2022. Current third-quarter estimates have EPS 24% higher than the previous year.

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After an impressive start to the year, airline stocks have moved lower in the past month or so, as a number of factors, including the regional banking turmoil and higher oil prices, hurt sentiment. The NYSE Arca Global Airline Index rose more than 16% in the first three months of 2023 but has fallen 7.5% since then.

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But the spring and summer months are historically good for airlines, and demand this year looks strong–United Airlines said last week that international bookings were up 15% in March compared with the year-ago period.

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Earnings season is an opportunity for carriers to show investors whether a bumper summer travel period is around the corner. Any signs of weakening demand, and that economic conditions and elevated airfares are finally weighing on consumers’ desire to travel, could ensure the stocks remain grounded at current levels, or lower.  

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“It is important to contextualize the first quarter as it is historically the least important quarter for the airlines (13% of annual earnings pre-pandemic),” Melius Research analyst Conor Cunningham said. “Although results for the first quarter 2023 will be choppy, commentary on spring and summer travel is key to 2023,” he added.

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Therefore second quarter forecasts, as well as full-year guidance, will likely pique the market’s interest. A number of other factors, including labor costs and pilot pay deals, as well as the impact of fuel prices will also be closely watched.

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Although American Airlines (AAL) increased its first-quarter profit guidance Wednesday, its new outlook fell short of analysts’ expectations for adjusted earnings per share of 1 cent to 5 cents. This earnings season will be heavily influenced by forward guidance from the carrier, which was not included in its update.

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