DAL - Delta United American expected to see the good times roll on: Earnings preview
2023-07-11 13:15:20 ET
Booming international demand and limited capacity mean the big three U.S. airlines will continue seeing strong gains, analysts said ahead of earnings reports, which kick off Thursday with Delta Air Lines, Inc. ( NYSE: DAL ).
And shares are still lower than they were before the pandemic.
"The network carriers have a lot of momentum," Citi Research Managing Director Stephen Trent said in an interview. "The outlook is very good."
Delta ( DAL ) is expected to report EPS of $2.36 and revenue of $15.46B before the open Thursday. The consensus for United Airlines Holdings, Inc. ( NASDAQ: UAL ), which reports July 19 post-market, is for EPS of $4.06 and revenue of $13.95B. American Airlines Group Inc. ( NASDAQ: AAL ), which reports July 20 pre-market, is expected to report EPS of $1.59 and revenue of $13.7B.
U.S. airlines, which received support from the government during COVID when they were forced to stop operating to try to help stem the spread of the virus, are seeing demand — and in particular, international demand — soar post-pandemic. There's also an insufficient supply of airplanes driving revenue higher, while a shortage of labor is pushing costs up. Jet fuel costs, however, have come down over the past year.
"We have a constructive view on the group's performance, so when we look at the second quarter demand indicators, they continue to look pretty good," Trent said.
In fact, UAL, DAL and AAL are outperforming the discount airlines, which Trent said is the opposite of what would usually occur when oil prices start to moderate because the international long-haul routes have continued to spool up. The three airlines have redirected resources, canceling up to 100 domestic destinations in 2022 as international demand is outweighing domestic.
Stretching the season
Ahead of earnings reports, Raymond James analysts Savanthi Syth and Matt Roberts updated estimates for U.S. airlines: “Our 2023E-25E EPS mostly move higher primarily due to a lowered fuel price forecast, albeit still above the forward curve.”
The big three are "now benefiting from a healthier cost basis overall and this enormous amount of international demand," Seeking Alpha analyst Tim Dunn said in an interview. "One of the tendencies that I think we will continue to see play out is the transatlantic season is being stretched, to a longer portion of the year."
Dunn said the traditional June to September season has been stretched from March to October, and may last beyond the pent-up COVID-driven demand.
Raymond James’s Syth and Roberts note, however, that there is a high level of uncertainty and limited visibility into the fall.
“We continue to reflect a moderation in demand in 2H23 despite a strong summer,” the analysts wrote in a June 25 note. “However, we are not modeling a severe (in terms of magnitude or duration) demand downturn. If it were to transpire, there is likely a partial offset from lower fuel (even if it remained at current levels) and still recovering demand in certain international markets and select business sectors.”
“We continue to believe airline stocks would perform well in a shorter and/or shallower downturn scenario,” Syth and Roberts said.
Also impacting travel is the lack of planes, air traffic controllers and even pilots — a career now paying a lot more than in the past, Trent said. And those scarcities aren't likely to be settled soon.
"It's going to take years to resolve," Dunn said.
For the first half of 2023, United ( UAL ) and Delta ( DAL ) were both up about 45% while American Airlines ( AAL ) rose 41%.
DELTA
Delta ( DAL ) is Citi's number one pick, Trent said. The airline said at a recent event that they are seeing very good momentum in terms of passenger revenue and co-branded card revenue.
"Delta ( DAL ) is aligned for a strong quarter as jet fuel prices continued to decline and demand for air travel remained robust triggering the airline to increase its revenue growth forecast to 17% to 18% from 15% to 17% with operating margins of 16% up from 14% to 16% providing an EPS lift of $0.25 to $2.25 to $2.50," Seeking Alpha analyst Dhierin Bechai said.
"Strong demand is being translated into value by strong execution within the airline," Bechai said.
"We like DAL's strong franchise, mgmt. Team and network, making it out preferred Legacy carrier that can benefit from a snapback in corporate and international," Morgan Stanley wrote in a July 6 note. "The stock has significant room for upside."
AAL
Citi is neutral on American ( AAL ) as it's the most exposed to the domestic market of the three. It's also going to lose some revenue from the unwinding of its Northeastern Alliance with JetBlue Airways Corporation ( JBLU ), though it will take much less of a hit than the latter, Trent said.
Morgan Stanley noted that unlike in previous quarters, AAL wasn't likely pre-announce ahead of earnings.
"Despite the stock up ~42% YTD, American ( AAL ) is still the dark horse of the big-5 and they may be looking to establish a narrative that breaks out this quarter," Morgan Stanley said.
UAL
UAL is Citi's number two choice after Delta ( DAL ), though they did experience operational difficulties in June because of bad weather.
"We believe capacity will likely come in lower than expected and costs a bit higher due to this disruption as we have seen a strong correlation between cancelation data and achieving capacity plans," Morgan Stanley said. That said, "Lower-than-expected fuel costs could be a tailwind."
The bank modeled revenue up 15% year-on-year, even with the disruptions.
Dunno noted the company's "aggressive" fleet replacement plan could hold back stock appreciation. Nonetheless, "Airline stocks are going to recover and this could very well be the year we see significant improvement."
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Delta, United, American expected to see the good times roll on: Earnings preview