Delta (DAL) Q3 Earnings: Shares Down on High Costs & Weak Guidance

Delta DAL reported their third quarter fiscal 2019 results Thursday before the opening bell. The airliner’s shares are down over 2% in intraday trading, and the stock has risen roughly 5% in 2019 thus far, lagging slightly behind the broader transportation market’s 5.3% gain.

The airline industry as a whole has had a relatively flat year after Boeing’s BA 737 MAX had to be grounded after a couple of fatal crashes, and fixed and variable costs continue to be high. Let’s take a look at how Delta performed in Q3 and where they might go from here.

Rising Costs Overshadow Robust Sales

Strong travel demand, particularly from high-paying consumers, helped boost Delta’s quarterly revenue and earnings. The company also announced that they would be hiring a large number of employees through their latest expansion initiative. However, the strong rise in sales and company expansions plans were overshadowed by the rising costs that Delta forecasted.

In Q3, Delta brought in $12.56 billion in revenue, up 5% year-over-year, while its earnings climbed 20.2% to $2.32 per share. Passenger revenue rose 6% to $11.4 billion and cargo sales declined 17% to $189 million. Revenue gained from other streams popped 3% to $961 million. Geographically, Domestic sales lead the pack with a 7.8% hike to $7.97 billion and Pacific sales, which include China, fell 4.6% due to the ongoing trade war to $696 million. Atlantic and Latin America sales rose 3.2% and 1.2%, respectively.

Delta’s performance was boosted in the quarter since it doesn’t fly the Boeing 737 MAX and avoided the complications from the grounding. This was not the case for its industry peers like American Airlines AAL and Southwest LUV who had to cancel thousands of flights because of the aircraft’s grounding. Delta CEO, Ed Bastian, commented that “As a result, Delta picked up additional market share, which it expects to hold onto.” The airline increased wages for ground staff and flight attendants by 4% on Oct. 1.

The airliner also announced that they are planning on hiring 12,000 new employees through 2020 as the company expands its operations. The company said they are in the process of hiring 6,000 people this year and they expect at least the same amount next year. Ed Bastian stated, “We’re hiring pilots, we’re hiring flight attendants, we’re hiring ground staff. We’re hiring in all categories of the company.”

Outlook

Despite the overall strong performance in Q3, Delta gave weaker-than-expected financial guidance for the next quarter, forecasting EPS of $1.20 to $1.50 in the last three months of 2019. The company said it expects its costs, excluding fuel, to rise as much as 5% in that period from a year ago.

Our Q4 consensus estimates projected earnings to jump 15.38% to $1.50 per share, but those estimates may be revised lower in the coming days. Estimates also project net sales to rise 4.79% to $11.26 billion. Passenger sales are expected to pop 4.69% to $10.1 billion. The cargo segment is anticipated to fall 4.35% to $204.7 million while other revenue streams bring in $999 million for a 13.4% increase.

Fixed and variable costs continue to be headwinds not just for Delta, but other airliners as well. The ongoing trade war between the US and China has also weighed on the company’s Pacific sales and will continue to for the foreseeable future if no deal is reached. The Trump administration’s plan to implement a 10% tariff starting October 18th on aircraft made in the European Union will also significantly impact the company in Q4. The company has one of the strongest balance sheets in the industry, but macroeconomic headwinds continue to exacerbate investor worries. Delta Airlines sits at a Zacks Rank #3 (Hold).

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