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Market Insights

Delta earnings to set tone for travel stocks

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At the end of last year we covered American Airlines and the rollercoaster ride that airline stocks have generally been on ever since Covid appeared.

It certainly appears that the omicron variant is milder, new therapeutics will help manage future outbreaks and at the risk of over-generalising, the pandemic will soon become endemic as immunity via vaccines and exposure protect the global population.

Delta Airlines will report earnings before the open on Thursday and could very well set the tone for many travel stocks in the following weeks.

Over the past month, Delta has outperformed. In the following chart, DAL is plotted against the S&P (SPY), the broad transportation sector ETF (XTN), and the Global Jets index (JETS).

delta vs xtn

Earnings Expectations

  • Earnings per share (EPS) of $0.11 in the fourth quarter
  • Revenue growth of around $9.2 billion
  • Adjusted pre-tax profit of $200 million

That’s the backwards look covered. How about the future?

According to ZACKS analysts, DAL expects:

  • In 2022, DAL will reach approximately 90% of the 2019 level.
  • In 2023 and beyond, to achieve pre-pandemic levels of capacity.
  • In 2024, adjusted revenues exceeding $50 billion.

By which point the company expects earnings per share to surpass $7.

Morgan Stanley analysts assigned an overweight rating and price target of $62:

“Management laid out a plan to meet and exceed pre-pandemic financial benchmarks by 2024 by building a best-in-class premium airline. The plan is sound and targets appear conservative though the near-term trajectory remains outside of management's control.”

That represents approximately $20 upside from current pricing as we can see on the chart below:

delta chart

The recent turnaround has seen the stock flip to the other side of the 20 day moving average, and it’s now eyeing the 200 DMA above.

It’s not all about Delta. The travel industry is keen to move on from the pandemic, and this year could see the difficulties with testing and vaccination passports lifted.

Add in some pent-up demand for travel, and 2022 could be a bumper year for all travel stocks. Comments from Delta’s investor call will be keenly watched for early clues, and their comments could reverberate through the entire sector.

Commenting in the Q3 report, Delta President Glen Hauenstein said:

“Our revenue recovery has shown strong progression through the course of the year as our customers return to the skies. With robust holiday demand and an expected improvement in corporate and international demand, we expect total December quarter revenue to recover to the low 70s percentage relative to 2019.”

Corporate and international demand will continue to be huge drivers for the airline industry, so a report from China’s Civil Aviation Administration confirming that Zero Covid policies would take precedent throughout 2022 will not be welcome news.

The CAAC said that from 2023-25 "The focus is to expand the domestic market, restore the international market, release the impact from reforms and improve the level of opening up."

Extremely high levels of travel and tourism this year could see the airlines out of the Covid abyss, but investors will likely want to see strong demand upon return of international business travel to really seal the deal.

Not investment advice. Past performance does not guarantee or predict future performance.

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