2023-04-13 13:37:09 ET
Summary
- Delta Air Lines Q1 results missed on EPS but exceeded revenue expectations from analysts.
- Delta missed its own revenue guide due to lower capacity flown during the quarter.
- While Delta sees strong demand ahead, the performance as well as the guidance suggests that pressure on unit revenues is increasing in the final recovery phase.
- Despite the pressure, I do believe that at current prices Delta Air Lines share do not reflect its cash flow potential.
Delta Air Lines ( DAL ) reported its first quarter results. While Delta reconfirmed its 2023 outlook and booked record cash flow for the March quarter, the stock is trading lower today. In this report, I look at the results as well as the guidance for the June quarter and the full-year outlook.
Delta Air Lines Misses On Revenues And Earnings
Delta Air Lines
Analysts had expected $12.25 billion in revenues, so the $12.8 billion in revenues was above expectations but Delta had expected $12.9 billion to $13.2 billion in revenues. Nevertheless, we saw unit revenues up 23% and capacity up 18% resulting in a 51% increase in passenger revenue while cargo revenue decreased 28% for an overall 36% increase in revenues. From the midpoint revenues fell below expectations by around 2%. This was driven by capacity being 1% lower than anticipated. If we piece the 2% revenue shortfall and the 1% capacity shortfall together, then we might be seeing why there might be some pressure on the stock price as the other 1% in the revenue shortfall has to come from somewhere which suggests that with other revenue streams being strong the unit revenues for passenger service might be a bit softer than expected.
CASM-Ex was up 5% whereas Delta had expected the figure to be up 3% to 4%. That additional percentage point was driven by the lower than expected capacity flown during the quarter. Adjusted operating margin came in at 4.6%, which was at the lower end of the 4% to 6% range.
Earnings per share were guided to be in the $0.15 to $0.40 range with $0.25 reported which was below the mid-point of the range and below the $0.29 per share that analysts were expecting , which also features into the lower share prices.
Delta Air Lines Continues To Deleverage
One thing that I believe is not getting the attention it deserves is the adjusted operating cash flow which was $2.9 billion, marking the strongest March quarter cash flow ever. Delta used the strong cash flow to reduce its debt by $1.2 including $695 million in accelerated debt repayments, which at an interest rate of 7% will save the company in interest costs, meaning that the company has completed its debt reduction ahead of schedule. For the remainder of the year Delta targets a 3x to 3.5x leverage while its net debt currently stands at $21 billion. With a strong summer quarter ahead, we can expect Delta to be opportunistic to take out more gross debt and associated interest costs.
June Quarter Guidance and FY 2022 Forecast
Delta Air Lines
Adjusted revenues are expected to be up year-over-year by 15% to 17% to $14.2 billion to $14.4 billion with a strong operating margin of 14% to 16%. Combined with lower fuel prices and maintenance cost tapering, this should result in strong operating margins and deliver $2 to $2.25 in earnings per share. Analysts are currently expecting $14.3 billion in total revenues and $1.66 in earnings per share. So, Delta’s guide is significantly higher and I expect estimates to catch up in the coming weeks as there's a bit more clarity on the summer.
Corporate travel is 90% recovered excluding China and 85% recovered domestically providing both some padding against any weakening in unit revenues as well as a growth opportunity. The revenue is expected to be up in the same range as capacity expansion, which does suggest that from here we're not going to see any major strengthening in unit revenues. For 2023, Delta has maintained its guidance.
Corporate travel and international expansion provides some opportunity for growth, though we also are seeing that unit revenues are somewhat maxed out, making flight resumptions to China maybe even more important for solid growth. Throughout the year, we should see some additional elements materializing. Core maintenance costs should drop as Delta reactivates most of its fleet taking out the associated reactivation costs and increasing the capacity of the airline which allows better cost amortization while fuel costs will also drop.
Conclusion: Delta Air Lines Shows Strength
I think overall Delta is showing a strong trajectory. I like the way the airline approaches the business and I believe they're one of the airlines coming stronger out of the pandemic. However, while Delta sees opportunities for more premium leisure sales and continues to see a strong demand environment, I think if you look at the performance and their guidance you're given more and more the impression that as capacity gets added to the market you will see more pressure on unit revenues. So, the final phase of the capacity recovery is going to be significantly different from the prior phase where airlines could throw in capacity and still see unit revenues boiling up. I believe that in the face we're in now we should be mindful about capacity additions putting more pressure on unit revenues.
For further details see:
Delta Air Lines Stock Falls After Earnings Miss