Delta Air Lines Q2 preview: Where next for DAL stock?

When will Delta Air Lines release Q2 earnings?

Delta Air Lines is scheduled to release second quarter earnings on Wednesday July 13.

Delta Air Lines Q2 earnings consensus

Delta Air Lines is forecast to report revenue of $12.3 billion in the second quarter. That would be up 93% from the year before, but the company is comparing its performance to pre-pandemic levels and this will be down around 2.2% from the second quarter of 2019.

Wall Street forecasts the airline will report an adjusted profit of $1.59 per share, which would turn from the $1.07 loss posted the year before.

Delta Air Lines Q2 earnings preview

Delta Air Lines said it would be operating at 84% of capacity compared to two years ago as the recovery from the pandemic continues. The two key areas that markets are focused on how the airline is capitalising on the rebound in demand for international travel, and how efficiently and profitably it can do it amid rampant inflation.

Domestic travel in the US has experienced a swifter recovery than international flights. Domestic flights were back at 83% of pre-pandemic levels in the previous quarter but international fares had recovered to just 54%, although both should have improved further in the second quarter.

Airlines have found it difficult to cope with the revival in demand this year, forcing them to cancel thousands of flights as they struggle to recruit staff that had been laid-off when the industry was crippled during lockdown. Delta Air Lines CEO Ed Bastian has apologised for the disruption and said it has cut around 100 daily flights from its schedule through to early August in an effort to minimise the number of last-minute cancellations. Still, 96% of Delta’s scheduled departures were completed during June.

One of the biggest challenges facing the industry is rising costs at a time when airlines are having to compete fiercely on price to attract customers back this summer. For example, adjusted fuel costs alone are expected to rise to a region of $3.20 to $3.35 in the second quarter from $2.79 in the first, and labour costs per available seat mile is forecast to be over 30% higher. Although prices have risen over the past two years as a result, they have not increased enough to fully absorb higher expenses. All-in-all, the company’s cost per available seat mile will be up 17% versus pre-pandemic levels in the period, whereas the industry’s average US domestic fare is only 7% above pre-pandemic levels, according to Bankrate.

Still, Delta Air Lines has said it should deliver an operating margin of 12% to 14% in the second quarter. That will mark a strong improvement from below 10% in the first, but below the 17% reported back in 2019. The sequential expansion will be fuelled by improved capacity and demand, even if it is to be held back by rising costs.

Importantly, Delta Air Lines has continued to generate cash and is forecast to report operating cashflow of $1.9 billion in the second quarter – a new post-pandemic record. Free cashflow should also see a significant improvement and hit $1.4 billion. Delta Air Lines has said it should have ended June with around $20 billion of adjusted net debt but analysts believe liquidity will have remained above the $13 billion mark, including an untapped $2.9 billion credit facility.

The outlook for the third quarter will prove highly influential in deciding how markets respond to the update this week, and Wall Street believes it will be a significant quarter that will see the airline’s revenue surpass pre-pandemic levels. Analysts are looking for $12.8 billion in revenue in the third quarter, which would be up 1.6% from 2019. However, its operating margin is forecast to remain under pressure and drop back to 10.3%, which would be down almost two-thirds from what was being reported before the Covid-19 crisis.

Things remain tough for the airline industry and the rebound in demand could be disrupted should an economic downturn gain traction later this year. However, analysts remain hopeful that airlines are in a much better position to weather any downturn. JPMorgan said last month the recovery in international travel, much of which is driven by business travel, is yet to come and that US airlines have record levels of liquidity. ‘We believe risk-tolerant investors should begin assembling a basket of airline equities, given the precedent for outsized gains following corrections of the magnitude currently being flirted with,’ JPMorgan said.

Where next for DAL stock?

Delta Air Lines shares slipped to their lowest level in 20 months last week before recovering back above the $29.50 mark – which should be treated as the initial floor for the stock going forward. The RSI slipped into oversold territory when this was last hit, suggesting it should hold firm. We could see shares fall toward $29.50 if it fails to hold and a breach below here would be more significant considering the next level of support is at $24.30.

The RSI is in bearish territory but there has been some divergence this year, suggesting a bullish reversal could be on the cards. That is reinforced by the fact average trading volumes have slumped to suggest selling pressure is easing. The five-day average volume at time has dropped over 13% from the 10-day average, which in turn is some 16% below the 100-day average.

The stock has struggled to close above $31.30 during the past month but a break above here could open the door to a swift recovery back toward the moving averages, first to $36.50 (in-line with the 50-day moving average). After they have been recaptured, it can bring $45 into the crosshairs, which has proven to be a key level of resistance over the past two years. From there, $48 comes onto the radar. Notably, the 19 brokers that cover Delta Air Lines are extremely bullish on the company’s prospects with an average Buy rating on the stock and a target price of $52 – some 75% above current levels.

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