Where we’re headed: The announcement will do little to calm fears that the airlines won’t retain the benefits of lower fuel costs.
Delta will release its next earnings report on Jan. 10, but Thursday’s preview of the quarter has left many investors downbeat about the airline’s prospects.
Delta raised its fourth-quarter earnings-per-share guidance to $1.25-$1.30 from $1.10-$1.30, yet that still put the midpoint of its profit forecast below the $1.29 consensus estimate. It sees revenues of $10.96 billion, ahead of the $10.8 billion analysts were expecting. Delta expects adjusted total revenue per available seat mile (RASM) up 3%, and it sees 4% capacity growth.
This is the second time Delta lowered its fourth-quarter unit revenue forecast in two months, writes
Helane Becker, which led investors to worry that RASM will continue to weaken throughout 2019. The idea that Delta’s results are a downbeat harbinger for the industry certainly has taken hold today, with airline stocks down across the board, although she argues that “other airlines are not necessarily seeing the same pressure as Delta.”
Becker reiterated an Outperform rating on the shares, arguing that “2019 should remain positive for the company as revenue momentum will be driven by revenue streams unrelated to economy fares.” However, she did lower her price target by $2, to $65, writing “this is exactly why investors are apprehensive about getting involved in the group in a declining fuel environment.”
Barron’s has reported often about the paradox of fuel prices: For much of 2018, higher oil prices were a major worry for investors, as they were concerned that jet fuel costs would eat into airline profits. The group actually did remarkably well on this score, passing along plenty of costs to customers and finding other ways to mitigate the impact. However, oil prices tumbled toward the end of last year, and plenty of investors worried that airlines’ resolve would crumble with it.
The industry has been notorious in the past for its lack of discipline, using jet fuel savings on the back of lower oil prices to slash fares: That not only means that they don’t get the benefit of lower commodity costs, but they also refresh the competitive atmosphere in the sector.
Last year was rife with thought pieces about whether or not the industry had truly changed: In the past decade, airlines had transformed from a sector that Warren Buffett mocked into one that he was rumored to be interested in investing in; companies seemed to be reporting solid profits on more-stable trends as global air travel demand grew and the benefits of consolidation bore out; and suddenly owning airline stocks didn’t seem so crazy.
Yet the problem is that this metamorphosis coincided with the nearly decade-old bull market run. While it seemed that airline management had changed its spots and done away with the poor business practices that long haunted the industry, the theory hadn’t been tested by a downturn.
Of course, if the recent selloff continues, airlines may indeed get to prove their mettle on that front—even if there’s plenty of reason to believe a recession isn’t around the corner. Yet Delta’s latest pre-announcement, even if it doesn’t portend an industrywide lack of discipline—shows that investors are still wary of giving airlines the benefit of the doubt, given their record.
There’s also a sense of déjà vu: In early January 2018, United Continental Holdings (UAL) sparked fears that rippled through airline stocks after it announced capacity increases ahead of expectations. Investors worried that this was yet another sign of that lack of discipline. However, United turned out to be the best-performing big airline stock in 2018—by a long shot—as the rest of the sector wobbled. Will Delta be this year’s United, for better or worse? Time will tell.
Delta is down 7.9% to $46.15 in recent trading.
Make the Connection
Delta is one of >Barron’s 2019 picks.
Airline insiders have also been buying up stock.
Write to Teresa Rivas at [email protected]
Source : https://www.barrons.com/articles/delta-stock-falls-8-stoking-drops-for-airlines-51546537355