Delta Air Lines (DAL) Reports Earnings – Says 'Murky' Economy Has Now 'Stabilized'
Wall Street's outlook for summer travel got a boost today after Delta Air Lines' (DAL) latest earnings beat...
The airline says bookings have finally "stabilized" after months of lower demand and it reinstated its profit outlook. Delta had previously pulled forward guidance in April due to a "murky" outlook thanks to global trade uncertainties.
So today, Wall Street is celebrating... pushing DAL stock up by double digits.
An Early Warning Sign for the Economy
Delta's revenue held steady at $15.5 billion, with an increase in premium-seat sales that largely offset a decline in revenue from its lower-cost, basic fares...
We like to watch airlines as an early warning sign for the wider economy because discretionary travel is one of the first things families cut when budgets tighten.
And the message for investors here on the overall economy is nuanced...
Demand for travel may have stabilized, but airlines are increasingly relying on customers who are willing to spend more to replace more price-sensitive travelers. As Delta CEO Ed Bastian said in an interview with CNBC:
People are still traveling... What they've done is they've shifted their booking patterns a little bit. They're holding off making plans until they're a little closer in to their travel dates. And so that's shifted some of our bookings and yield management strategies.
The company also noted that transatlantic demand was strong, pushing international revenue up from last year's record levels. But domestic leisure travel softened.
That's exactly what Deloitte's latest summer-travel survey flagged a few months ago when it found Americans scaling down their planned vacation budgets. Deloitte reports...
The more frugal approach will likely be felt unevenly across the travel industry. Rather than shy away from any categories in huge numbers, travelers surveyed are making individual choices to fit their trips into smaller budgets. And plans might change with further economic developments, or at the time of bookings, and even in destination.
The latest Consumer Price Index ("CPI") data from the Bureau of Labor Statistics showed that airline fares have declined 7.3% from the prior year, the steepest slide of any major services category.
And data on credit- and debit-card spending from Bank of America (BAC) also saw a similar split between income brackets – with the sharpest drop in the sub-$75,000 cohort, echoing Delta's own split between premium and economy demand.
The Secret Engine Helping Protect Delta's Profits
When investing in an airline, you'd normally focus on factors like flight volume or average revenue per seat. But most investors totally ignore an entirely different metric that matters much more for these companies.
Joel Litman from our corporate affiliate Altimetry says what really makes a difference for an airline is its frequent-flyer program...
Frequent-flyer programs let you generate points on your preferred airlines. Most airlines have programs that offer "miles" based on how much you travel in a given year. Some even let you generate miles when you make purchases on a branded credit card.
Said another way, you get rewarded for loyalty. And so does the airline.
He notes that Delta has the largest loyalty program in the world. And its financials are much more profitable when you factor in its SkyMiles loyalty program.
And in the latest quarter, Delta's loyalty revenue was up 8%... with American Express (AXP) paying the company $2 billion from to their co-branded cards.
That helped cushion the company's lower main‑cabin fares and helps explain how operating margins stayed above 12% even as ticket prices fell.
What Does the Stansberry Score Say About Delta?
Delta's loyalty revenue, credit‑card economics, and increased dividend signal financial strength even in a softer environment for overall demand.
Shares don't look expensive here, with the Stansberry Score giving Delta an A grade on valuation... But shares only receive a C for financial strength and a D for capital efficiency.
Looking ahead, keep an eye on the airline-fare line in the CPI release due to come out next Tuesday, July 15...
So far, the story of the U.S. economy is that of divergence... where premium demand remains but the cheap seats are getting cheaper as Americans feel their income pinched.
What Will a Weaker Dollar Mean?
And it will matter for Delta, too. Roughly 30% of Delta's passenger revenue comes from flights that originate or terminate outside the U.S. – and when the dollar weakens, each euro-, pound-, or yen-denominated fare converts into more U.S.-booked revenue.
As Delta noted in its latest annual report...
A 10% change in the value of those respective currencies against the U.S. dollar would have an approximately $160 million impact on our financial statements.
However, a weaker U.S. dollar also likely means high-priced crude oil and jet fuel.
Thirty-year stock market veteran Dan Ferris, a senior analyst at Stansberry Research, notes that commodities would also benefit from a weaker dollar, since most commodities are priced in dollars. Oil, for example, tends to rise in dollar terms when the dollar falls because producers get less value per barrel if those dollars are weaker.
So investors should prepare for a broad commodity uptrend... As Delta says in its annual report:
A one cent increase in the cost of jet fuel per gallon would result in approximately $40 million of additional annual fuel expense based on annual consumption of approximately four billion gallons of jet fuel.
And that's just the start... What will happen across the economy if this radical economic plan continues to unfold in Washington, D.C... A plan that could slash the dollar's purchasing power by 30% to 40%?
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