Delta drives rally in sector due to expectations of recovery

(Bloomberg) — Delta Air Lines Inc. drove an uptick in airline and leisure stocks when it said that a sharp spike in summer travel bookings will help the company overcome rising fuel costs and the slow return of business travel.

Although the airline recorded losses in the first quarter, it maintained its previous projections that it would be profitable in the remaining periods of the year. Delta is sensitive to the risk that rate increases will erode demand, but it sees no sign of that happening.

“During the early part of the summer, booking activity has been quite strong,” Delta CEO Ed Bastian said in an interview. “In the past month, we've seen more sales and booking activity at Delta than at any time in our history,” despite offering only 90% of the number of pre-pandemic seats for sale.

Strong reserves have helped the sector cushion the blow of rising fuel prices, which have skyrocketed by 155% since March 1, after Russia invaded Ukraine. This increase in spending, especially in the north-east, has threatened to erode the sector's profits. But Delta and other airlines have reduced the number of seats available to increase prices and continue to expect summer demand to exceed pre-pandemic levels.

The confidence expressed by Delta, the first major airline to present first quarter results, elevated shares across the sector, as well as other leisure related values such as SeaWorld Entertainment Inc, Carnival Corp. and Caesars Entertainment Inc.

“Demand remains strong as covid continues to recede and countries eliminate testing and quarantine requirements,” Cowen analyst Helane Becker said in a note to customers. “Delta's business travel is improving and domestic corporate sales recovered by 70% in March.”

The analyst projected heavy international traffic in the North Atlantic for this summer.

In fact, the transatlantic business is already “coming back strongly,” Delta President Glen Hauenstein said in a conference call with analysts.

Delta has said it will have no problem raising rates to cover fuel prices this quarter and possibly during the summer. Each 1-cent per gallon increase adds $40 million to the company's annual costs, according to a regulatory statement.

Challenges remain

Despite the airline's good prospects, the sector is not out of danger. Deutsche Bank analyst Michael Linenberg has predicted that 11 U.S. airlines will see a pre-tax loss of up to US$6.2 billion in the quarter.

And while demand for domestic leisure is around 2019 levels for many airlines, corporate travel in the United States is still up to 40% below pre-covid-19 levels, according to Sheila Kahyaoglu, an analyst at Jefferies. International travel by large companies lags behind a broader economic recovery, as companies have been slow to send their workers back to offices. In addition, much of Asia is closed to incoming passengers.

Delta posted an adjusted loss in the first quarter of $1.23 per share, less than the average loss of $1.26 according to analyst estimates compiled by Bloomberg. Revenues were US$8.16 billion, while Wall Street projected US$8.12 billion.

Original Note:

Delta Spurs Leisure Rally, Projecting Summer Travel Rebound (2)

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