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Delta (DAL) Stock Down Post Q2 Earnings Miss on High Costs

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Delta Air Lines’ DAL second-quarter 2022 earnings (excluding 29 cents from non-recurring items) of $1.44 per share fell short of the Zacks Consensus Estimate of $1.71. Escalated operating expenses induced the earnings miss. Multiple flight cancellations in May and June also hurt results. The earnings miss disappointed investors, resulting in the stock shedding value in early trading. In the year-ago quarter, Delta incurred a loss of $1.07 per share when air-travel demand was not as buoyant as in the current scenario.

Delta’s revenues came in at $13,824 million, which not only beat the Zacks Consensus Estimate of $13,608.9 million but also soared 94% from the year-ago quarter’s figure as air-travel demand rebounded from the pandemic lows. The uptick in air-travel demand in the United States can be gauged from the fact that 75.9% of second-quarter 2022 passenger revenues came from the domestic markets.

The buoyant air-travel demand scenario is also evident from the fact that total operating revenues increased 10% from second-quarter 2019 (pre-coronavirus) levels. Passenger revenues, accounting for 79.3% of the total revenues in the June quarter, declined 4% from the levels recorded in the comparable quarter of 2019 to $10,958 million. Cargo revenues surged 86% from the second-quarter 2019 actuals. This was the best-ever performance by the cargo unit in the second quarter of a year. Other revenues increased to $2,594 million from $982 million three years ago.

Adjusted operating revenues (which exclude third-party refinery sales) came in at $12.3 billion. This reflected a 99% recovery from the second-quarter 2019 level. Second-quarter 2022 capacity was 82% restored compared with the second-quarter 2019 level. Adjusted operating margin was 11.7%. This was the first quarter where DAL generated a double-digit operating margin since 2019. DAL remains on track to achieve its targets of more than $7 in adjusted earnings per share and $4 billion of free cash flow, set for 2024.

Other Financial Details of Q2

Below we present all figures (in % terms) compared with the second-quarter 2019 results.

Revenue passenger miles (a measure of air traffic) tumbled 18% to 51,519 million. Capacity (measured in available seat miles) too contracted 18% to 58,903 million. Load factor (percentage of seats filled by passengers) was down to 87% from 88% in the comparable quarter of 2019.

Passenger revenue per available seat mile (PRASM) increased 17% to 18.60 cents. Passenger mile yield increased to 21.27 cents from 18 cents in the second quarter of 2019. On an adjusted basis, total revenue per available seat mile (TRASM) increased 20% to 20.90 cents in the June quarter.

Total operating expenses, including special items. escalated 18% to $12,305 million. Aircraft fuel expenses and related taxes surged 41% to $3,223 million in the reported quarter. Fuel gallons consumed contracted 22% to $863 million. Average fuel price per gallon (adjusted) surged 85% to $3.82. Non-fuel unit cost increased 22% to 12.76 cents in the reported quarter.

The airline had liquidity worth $13.6 billion at the end of the June quarter (including $2.8 billion in undrawn revolving credit facilities). Delta, currently carrying a Zacks Rank #3 (Hold), had an adjusted debt and finance lease obligations of $27.2 billion with adjusted net debt of $19.6 billion. Operating cash flow during the quarter was $2.5 billion. Free cash flow for the reported quarter was $1.6 billion. Gross capital expenditure was $864 million during the quarter.

Q3 Outlook

All numbers in percentage are compared with the third-quarter 2019 figures. For the third quarter of 2022, the carrier expects capacity to decline in the 15-17% band. Non-fuel unit costs are expected to increase 22% from the third-quarter 2019 actuals. Total revenues are likely to increase in the 1-5% band (i.e., expected in the $12.6-$13.1 billion range).

Gross capital expenditures and adjusted net debt are likely to be $1.8 billion and $20 billion, respectively, in the September quarter. Management also expects fuel price per gallon in the $3.45-$3.60 range. Delta expects adjusted operating margin in the 11-13% range. Non-operating expense is expected in the $180-$200 million band. Profit-sharing expense is expected in the $180-$220 million band. Tax rate is anticipated to be roughly 24%.Delta expects to generate a “meaningful full year profitability”.

Stocks to Consider

Below we present some better-ranked stocks in the broader Transportation sector:

C.H. Robinson Worldwide CHRW, currently carrying a Zacks Rank #2 (Buy), operates as an asset-light logistics player. The improving freight scenario in the United States is aiding this Minnesota-based freight broker. Efforts to control costs also bode well. Measures to reward CHRW's shareholders instill further confidence in the stock.

C.H. Robinson has an impressive earnings track record. The bottom line surpassed the Zacks Consensus Estimate in three of the trailing four quarters (missing the mark in the remaining one), the average surprise being 17.1%. CHRW has witnessed the Zacks Consensus Estimate for 2022 earnings being revised 0.7% upward over the past 60 days.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks

Ryder System R has a trailing-four quarter surprise of 48.2%, on average, with its earnings having surpassed the Zacks Consensus Estimate in all the last four quarters. R is benefiting from improving economic and freight conditions in the United States.

Revenues in all segments grew (on higher rental revenues, new business and favorable pricing) in first-quarter 2022. R currently carries a Zacks Rank of 2.

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Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report

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C.H. Robinson Worldwide, Inc. (CHRW) : Free Stock Analysis Report

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