Delta Air Lines Stock Dives Despite Earnings Beat. Here’s Why.

The airline has started the year with a disappointment, forecasting full-year earnings per share of between $6 and $7. It previously had a long-term target for EPS of more than $7 in 2024. With earnings of $6.25 in 2023, it’s not quite the growth investors were hoping for.

Wall Street saw it coming, though. The consensus forecast among analyst tracked by
FactSet
was for 2024 EPS of $6.50.

Negative sentiment spread across the sector early Friday, made worse by rising oil prices following U.S.-led strikes on Houthi rebel sites in Yemen.

United Airlines
stock fell 7.8% in early trading,
American Airlines
was 7.5% lower, while
Southwest Airlines
declined 4.3%.

There are still positives for Delta, though. CEO Ed Bastian said air travel demand remains strong in 2024 and the company expects record revenue in the March quarter as the domestic environment improves and international demand continues to be a boon.

Delta said unit revenue will be between flat and down 3% in the current quarter. In the comparable quarter a year go, Delta benefited from a holiday travel meltdown, a boost the carrier won’t get this year. Operational revenue will grow between 3% and 6%, the airline said, while analysts are looking for around 5%.

The carrier reported adjusted EPS of $1.28 on revenue of $13.7 billion in the fourth quarter. Analysts were expecting adjusted EPS of $1.16 on revenue of $13.6 billion.

It capped off a stellar year for Delta, in which it generated revenue of $54.7 billion—a 20% increase on 2022. Pre-tax income doubled to $5.2 billion.

Not all airline stocks had a good year, though, and it wasn’t even smooth flying for those that outperformed, as mounting costs and softening domestic demand hit margins.

A perfect storm of factors combined to ramp up the cost pressures, including new pilot pay deals, rising fuel prices, and supply-chain issues such as aircraft delivery delays and engine maintenance problems. 

Delta’s outlook provides a reminder that those concerns are very much still in play in 2024.

The airline, which has strong exposure to booming international travel, was an outperformer as the shares rose 22%—the NYSE Arca Global Airline Index rose 14% last year.

Delta may still outperform this year, particularly with its international offering and greater resilience to cost pressures than the discounter airlines. Deutsche Bank analysts, led by Michael Linenberg, described the Delta’s 2024 earnings outlook as a “modest disappointment,” maintaining their Buy rating on the stock Friday.

A positive factor is that the carrier doesn’t operate any
Boeing
737 MAX 9 jets, so it won’t be affected by the aircraft’s temporary grounding following the emergency incident onboard an Alaska Airlines flight last week.

The MAX 9 problems will be thrust into the spotlight later in earnings season when
United Airlines
releases results on Jan. 23 and when
Alaska Air
reports two days later. The MAX 9 accounts for around 20% of Alaska’s fleet, and around 8% of United’s. 

Delta is one of Seaport Research’s top picks for the year, although it is cautious on the airline’s performance in the first quarter and on the stock in the near term. More broadly, Seaport’s Daniel McKenzie sees a “choppy ride” on the path to an earnings recovery for the sector this year.

“Airlines are taking clear steps to repair margins, but the cost shocks from historic wage resets and supply chain bottlenecks are too great without the further contribution from corporate travel, which likely doesn’t return until 2025/26,” he said in a note Wednesday.

It looks like the turbulence has well and truly started.

Write to Callum Keown at [email protected]