How Far Can Passenger Revenues Ail Delta's (DAL) Q2 Earnings?

Passenger revenues account for bulk of Delta Air Lines’ DAL top line (89.9% in 2019). However, the same is likely to have shrunk in the June quarter due to coronavirus woes, thus hurting this Atlanta, GA based carrier’s overall quarterly results, which will be announced on Jul 14.

Passenger revenues are recognized from three sources, such as ticket sales, loyalty travel awards and travel-related services. Geographically, passenger revenues are generated from domestic operations in the Atlantic, Latin American and the Pacific region.

Tepid Air-Travel Demand Induces Loss in Q1

Delta suffered its first quarterly loss since 2010, mainly due to the 18.2% fall in passenger revenues. Revenue passenger miles (a measure of air traffic) decreased 16.6% to 43.1 billion. With Delta making significant capacity cuts to compensate for the coronavirus-induced sharp drop in traffic, capacity contracted 5.7% to 58.88 billion. With the decline in traffic outpacing the capacity contraction, load factor (percentage of seats filled by passengers) was down 960 basis points to 73.1%.

Air-Travel Demand Deteriorated in Q2

Passenger revenues are likely to have been much lower in the June quarter than the first-quarter reading due to lower air-travel demand. This is because the COVID-19 pandemic started affecting the metric, mainly since March. Consequently, the entire second quarter (April-June months) bore the brunt of this meltdown in air-travel demand as opposed to only a single month in the last reported quarter.

In tune with the prevalent gloomy scenario, the Zacks Consensus Estimate for passenger revenues indicates a massive 735% plunge from the number reported in the March quarter. To mitigate the extremely depressing demand landscape, this currently Zacks Rank #3 (Hold) carrier is trimming its capacity, causing cancellation of multiple flights in the process. With traffic dwindling at a faster rate than capacity cutbacks, load factor is likely to have taken a beating in the second quarter.

Notably, the Zacks Consensus Estimate for Delta’s second-quarter consolidated passenger load factor stands at a dismal 39.4%, hinting at a decline from 73.1% reported in first-quarter 2020.

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Also, the Zacks Consensus Estimate for second-quarter passenger revenues per available seat miles (PRASM: a key measure of unit revenues) stands at 7.41 cents, implying a 42.3% slump from the figure reported sequentially.

Overall Top & Bottom-Line Projections

Due to the coronavirus-induced dismal air-travel demand, the Zacks Consensus Estimate for the second-quarter bottom line is pegged at a loss of $4.06 per share. For quarterly sales, the consensus mark is pegged at $1.4 billion, suggesting an 88.3% plummet from the figure reported in the second quarter of 2019.

Soft Air-Travel Demand: A Bane for the Entire Industry

The coronavirus-led weak air-travel demand is likely to weigh on results of all airline players. Delta apart, waning air-travel demand is likely to dent the second-quarter results of fellow airline players like United Airlines UAL, American Airlines AAL and Southwest Airlines LUV. While United Airlines will report results on Jul 21, American Airlines and Southwest Airlines will release the same on Jul 23, all three stocks carrying the same Zacks Rank as Delta at present.

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