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The uptick in air-travel demand in the United States (particularly on the leisure front) bodes well for Delta Air Lines DAL. However, escalated fuel costs are limiting bottom-line growth and emerging as a key downside.
Factors Favoring DAL
The gradual improvement in air-travel demand in the United States is a huge boon for Delta, currently carrying a Zacks Rank #3 (Hold). Owing to this tailwind, the carrier upped its revenue outlook for second-quarter 2022. Delta expects the June quarter's adjusted total revenues to be fully restored to the 2019 level. Previously, DAL had expected the same to have recovered 93-97% from the 2019 level.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Betterment of cargo revenues (up 37% year over year in 2021) is a positive too. In first-quarter 2022, cargo revenues surged 51% to $289 million. This was the sixth consecutive quarter when cargo revenues increased from the comparable levels in 2019. Cargo revenues in the March quarter were boosted by strong demand and favorable yields. The cargo unit is expected to continue performing well in the remainder of 2022.
DAL’s sound liquidity position is an added positive. The airline ended the first quarter of 2022 with cash and cash equivalents of $9,955 million, much higher than the current debt of $1,116 million. This implies that DAL has sufficient cash to meet its current debt obligations.
Escalating fuel costs pose a threat to Delta’s bottom line. Oil price is moving north, primarily because of supply concerns due to Russia's invasion of Ukraine. In first-quarter 2022, the average fuel price per gallon (adjusted) increased 37% to $2.79. Management expects fuel price per gallon in the $3.60-$3.70 range during the June quarter.
Due to higher staffing costs and employee-related expenses, Delta’s non-fuel unit costs (up 11% in 2021) are increasing. In first-quarter 2022, non-fuel unit costs increased 15% from the first-quarter 2019 levels. In the June quarter this year, the metric is expected in the 12.55-12.75 cents range compared with 10.47 cents recorded in the comparable quarter of 2019.
Stocks to Consider
Better-ranked stocks within the broader Transportation sector include the following:
Golar LNG Limited GLNG currently has a Zacks Rank #2 (Buy). GLNG has a decent surprise history as its earnings outperformed the Zacks Consensus Estimate in three of the preceding four quarters and missed the mark once, the average surprise being 42.1%.
Shares of Golar LNG have rallied more than 100% in a year. A strong LNG market boosted the stock. The staggering inflation flared up the oil and natural gas prices. Moreover, amid the Russia-Ukraine war, Europe is likely to look for gas supplies outside Russia. This is expected to drive demand for the LNG vessels, which bodes well for GLNG.
Southwest Airlines LUV presently sports a Zacks Rank #1. Continued recovery in air-travel demand bodes well for LUV. Anticipating a steady improvement in bookings, the carrier expects to reap profits in the remaining three quarters of 2022 as well as during the full year. Management predicts operating revenues to increase 12-15% in the second quarter of 2022 from the comparable period’s level in 2019. LUV is seeing strong bookings for the spring and summer trips.
The positivity surrounding the Southwest Airlines stock is evident from the Zacks Consensus Estimate for current-year earnings being revised in excess of 100% upward over the past 60 days.
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 currently carries a Zacks Rank of 2.
Strong freight market conditions in the United States are driving R’s growth. Ryder recently boosted its guidance for the second quarter as well as the full year owing to favorable pricing, and strong rental and used vehicle sales.
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