Delta Airlines (NYSE: DAL) delivered better than expected Q2 results as the travel sector continues to recover from the depths of the crisis. So far, the company's results showed little adverse impact from the Delta Variant, however, investors are obviously concerned as Delta's stock has dropped by 25% over the past couple of months.
Inside the Numbers
In Q2, Delta reported a loss in earnings per share of $1.07 which was better than analysts' expectations than a loss of $1.50 per share. Revenue came in at $6.3 billion, topping expectations of $6.2 billion. This was a decline of 49% compared to 2019's Q2 but was 76% higher than last year's Q2.
Another positive sign was the company's free cash flow turning positive. In its conference call, management cited improving business travel, more bookings for premium and first-class seats, and strong spending on Delta's co-branding credit cards as positive contributors.
The company also noted that demand is improving at a steady pace with the strongest category being vacation travel to destinations like Mexico, the Caribbeans, and Hawaii. So, many carriers have increased the number of routes to these places while eliminating other routes.
The company expects continued sequential improvement and has shown little adverse impact from the Delta Variant. Every month, the company keeps shrinking its gap between 2019 revenue and current levels. However, a gap will certainly remain especially as long-haul international travel which makes up a bulk of Delta's revenue, has yet to recover. Transatlantic passenger revenue is down by 85% from 2019. Transpacific revenue remains 87% lower. In contrast, domestic revenue is down by 45% with Latin America revenue 36% lower.
One contributing factor in Delta's turnaround is that ticket sales are higher by an average of 20% which is offsetting some of the revenue plunge. Skeptics on the company say that the company is benefitting from the typical uptick in summer travel. However, as long as the Delta variant doesn't turn into a severe outbreak, trends are positive in all categories including business travel and international travel.
The company is also positioned for this outcome as it seeks to add 36 new planes. The company cited strong demand for flights in the second half of the year as one reason for this decision.
Stock Price Outlook
Airline stocks have mainly followed the same trajectory. They plunged during the coronavirus then flat-lined before starting their ascent as the recovery and vaccinations began. By many measures, their stock prices fully recovered especially when accounting for new shares and debt issued.
Recently, the stocks have tumbled on profit-taking and Delta variant concerns. Despite the airlines' improving prospects, there is good reason to be cautious on their stock prices. Even prior to the coronavirus, airlines were losing money. Now with more debt and share dilution, EPS will trend lower. Further, they are going to face the same struggles as other businesses in adding workers to meet demand in future months. Therefore, investors should treat Delta and other airlines more like a trading vehicle rather than a 'buy and hold' investment.