Delta Air Lines (DAL) And Peers Gain Altitude After Group Lifts Revenue Outlook
2:38 pm Tuesday, March 15th, 2022
Delta Air Lines (DAL), United Airlines (UAL), and Southwest Air (LUV), are providing the market with much-needed good news after each company raised its guidance for 1Q22. The three major airlines, which are presenting at the JP Morgan Industrials Conference this morning, are experiencing strong spring and summer travel demand.
Accordingly, DAL now expects Q1 total revenue to be about 78% recovered versus 2019 levels, compared to its prior forecast of 72-76% recovered. Similarly, UAL is guiding for revenue to be near the better end of 75-80% recovered. Thanks to its very limited international exposure, LUV’s outlook is even brighter, with the company lifting its revenue guidance to 90-92% recovered from 85-90%. Travel restrictions abroad, especially in Asia, and stubbornly soft business travel demand has weighed on international bookings. By avoiding this headwind, LUV is ideally positioned to benefit from pent-up demand for leisure travel within the U.S.
Leisure travel has been an area of strength across the industry for several quarters. However, last quarter, Omicron created severe turbulence and caused airlines to cut capacity amid a surge in flight cancellations and a steep decline in near-term bookings. Sentiment on the group soured after Q1 revenue forecasts were lowered and as oil prices continued to rocket higher. Russia’s invasion of Ukraine and the ensuing economic fallout amplified investors’ concerns, sending shares of DAL, UAL, and LUV to 52-week lows last week.
Against that backdrop, the airline stocks were primed to reverse higher on a bullish update. In addition to the improved revenue guidance, other key items that stand out from today’s updates include:
Business travel demand is finally improving in a more substantive way, which we believe is a main driver behind the rallies in DAL, UAL, and LUV. In fact, UAL stated that business travel traffic is now the strongest it has been since the pandemic began, reaching 70% of 2019 levels so far in March.
LUV echoed UAL’s commentary, stating that managed business revenue has rebounded in March following an Omicron-related downturn in January and February.
DAL and UAL believe that a stronger-than-expected revenue environment will more than offset rising fuel costs, alleviating a mounting concern among investors. Both airlines are projecting solid pre-tax profits for the March quarter.
One blemish is that Q1 capacity is trending a bit lighter than anticipated, primarily due to Omicron and additional flight cancellations associated with geopolitical conditions. For instance, UAL is projecting that capacity will be down 19% versus is prior forecast of down 16-18%. Consequently, UAL believes that Cost per Available Seat Mile (CASM), excluding fuel, will increase by 18% instead of the 14-15% it had originally projected.
The main takeaway is that the recovery in air travel demand has really accelerated in March as COVID-19’s grip has slackened in the U.S. and across many other countries. Most encouragingly, business travel is making a major comeback, providing a potent catalyst for the industry. Airlines aren’t out of the woods just yet, though, due to soaring virus cases in China and the imposition of lockdowns there. A highly volatile geopolitical environment adds to the risk profile.
