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Delta earnings hit some turbulence

AInvestThursday, Oct 10, 2024 9:07 am ET
2min read

Delta Air Lines (DAL) reported Q3 earnings that fell slightly short of analyst expectations, with adjusted earnings per share (EPS) of $1.50 compared to the forecasted $1.52, and a notable decline from the previous year's $2.03. The company generated adjusted revenue of $14.59 billion, which was also just shy of the $14.65 billion expected by analysts. Passenger revenue came in at $13.11 billion, missing estimates slightly, while cargo revenue exceeded expectations with a 27% year-over-year increase to $196 million.

Shares of DAL fell approximately 6% in reaction to the news but have regained those losses. Bulls and bears are battling around the $50-psyche level. If DAL shares brush off the disappointing results and outlook, then it would be one more feather in the cap for bulls.

A significant factor impacting Delta’s Q3 results was a disruption caused by a CrowdStrike-related outage, which led to the cancellation of thousands of flights. The outage resulted in a direct revenue hit of approximately $380 million and lowered Delta's EPS by $0.45. This incident not only affected non-fuel expenses but also led to reduced fuel costs due to the cancellations. The overall impact highlighted operational vulnerabilities that Delta is actively addressing, as they seek compensation from CrowdStrike and Microsoft for the losses.

Delta provided a somewhat cautious guidance for Q4, forecasting adjusted EPS between $1.60 to $1.85, compared to the analyst estimate of $1.78. The airline expects total revenue growth of 2% to 4% year-over-year, with an operating margin in the range of 11% to 13%. While Delta's guidance suggests resilience heading into the holiday season, it also indicates a potential dip in travel demand around the upcoming U.S. presidential election, which could impact overall unit revenue.

On the demand side, Delta's management remains optimistic, citing strong bookings for the holiday period and positive trends in both domestic and international travel. The company reported that its diversified revenue streams, particularly from premium and loyalty services, drove 57% of total revenue in the quarter. Notably, the premium revenue outpaced the main cabin, and Delta saw growth in co-brand card spend, bolstering its loyalty revenue.

Internationally, Delta showed robust performance, especially in the Transatlantic and Latin American markets, with revenue growth driven by a rebound in demand following events like the Paris Olympics. The Pacific region also displayed strong travel trends, with increasing traffic to destinations like South Korea and Japan. Delta's joint venture with LATAM Airlines contributed positively to revenue growth in South America.

Delta's operational performance and cost management efforts were also highlighted, with a focus on driving efficiency amid rising non-fuel costs, which were up 5.7% year-over-year. The company maintained its outlook for low-single-digit non-fuel unit cost growth for the year, consistent with earlier projections. Despite the challenges faced in Q3, including the CrowdStrike outage and geopolitical factors, Delta continues to target strong returns on invested capital and has made progress in reducing its debt load, which has earned it an upgrade to investment-grade status.

Looking ahead, Delta remains confident in its ability to deliver record December quarter revenue and believes it is well-positioned for 2025. The airline's focus on managing capacity growth and rationalizing industry supply should help it navigate the evolving economic environment. While the guidance has been conservative, Delta's diversified revenue base and strategic initiatives in international markets provide a solid foundation for sustained growth.

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