Delta’s Earnings Were a Bright Spot for Travel. American and United Are the Next Tests.

After two years of posting pandemic-related losses, airlines are ready to make a comeback as demand inches back to prepandemic levels. But rising labor and fuel costs could take a bite out of profit for several quarters to come, making forward-looking guidance all the more crucial this quarter.

“While the US industry is getting close to a full revenue recovery, the profit aren’t there,” Peter McNally, global sector lead for industrials, materials, and energy at Third Bridge, said in an interview. “So the two things we’re looking for in these outlooks are capacity and the cost outlook.”


Delta Air Lines

‘(ticker:


DAL

) earnings beat last week assuaged some concerns. The air carrier signaled it saw a return to profitability in March, even as gas prices neared record highs, fueling hopes that other airlines would be able to pass on rising costs to their customers.

“Are you able to pass through some of these costs is the big question,” said Raymond James airline analyst Savanthi Syth. “And what Delta showed last week is that, at least based on Delta’s guidance, you can.”

Syth has a Buy rating on Delta. Third Bridge does not assign ratings to stocks it covers.

Whether other airlines can pull off Delta’s earnings beat remains to be seen. For one thing, Delta is one of the few airlines that owns a refinery, which helps hedge fuel costs, wrote UBS analyst Myles Walton in a Monday research note upgrading the stock to Buy from Neutral. It also benefits from strong premium trends, which could continue as travel rebounds, he added.

American Airlines (


AAL

) reports earnings ahead of the opening bell on Thursday. Wall Street is projecting the airline to post a loss of $ 2.39 per share on revenue of $ 8.79 billion. In the year-ago period, American lost $ 4.32 a share on revenue of $ 4 billion.

Last week, American shared its preliminary first-quarter results, with revenue estimates clocking in at $ 8.89 billion.

“American has been, according to our experts, pretty effective at hiring people, retaining people, and new leadership there is pretty operationally focused, so the expectations from our experts are actually pretty good for American,” McNally said.

MKM Partners analyst Conor Cunningham was also optimistic about American’s earnings, writing that it had a “cleaner cost story relative to United” (


UAL

). The company could “flirt with profitability” in the second quarter of 2022 given strength in revenue, he added. However, 2022 capacity could come down slightly compared with prior guidance due to delays in deliveries of


Boeing

(BA) 787 Dreamliner jets.

Only 17% of the 24 analysts covering the stock on FactSet rated it a Buy or Overweight, while 63% gave it a Hold, and 21% Underweight or Neutral.

United reports earnings Wednesday after the market closes. Forecasts are calling for revenue of $ 7.67 billion and a loss of $ 4.22 per share. Of the 24 analysts covering the stock, only 46% rated it at Buy or Overweight, while 38% have Hold ratings, and 17% Underweight or Sell. On Monday, UBS ‘Walton downgraded United to Neutral from Buy, expressing concerns over margin pressures as the airline executes a fleet-renewal plan.

United may have some of the “worst nonfuel unit-cost trends,” among its peers this quarter, Raymond James’ Syth said. She pointed to the company’s 777 aircraft fleet, which remained grounded.

“That’s assets that aren’t getting utilized,” she said. “The other thing that we’re going to be looking for is how they are performing on that nonfuel unit-cost basis.”

CFRA analyst Colin Scarola was more upbeat about United’s prospects, saying the shares were attractive at their current price point.

“For someone like United, we think [earnings] will get close to normalized by the end of this year, and then they’re much higher next year, ”Scarola said.

Both American and United shares could surge if the companies guide to a resurgence in business and international travel — which have lagged behind domestic leisure travel.

That lag has played out to the benefit of domestic airlines such as Alaska, which posted a profit in the last two quarters of 2021. While Street estimates are guiding for a loss of $ 1.59 per share on revenue of $ 1.66 billion when the company reports earnings Thursday morning, analysts are still sweet on the stock.

The company could be well-placed to navigate rising fuel costs thanks to its unique fuel-hedging strategy, Syth said. In addition, Alaska, like Delta, has been cautious about expanding its capacity, which could help boost margins.

“Their revenue versus 2019 might not be as strong as United or Delta, but combining with good cost execution we think they’ll show much better earnings recovery,” Syth added.

Syth has a Strong Buy rating on Alaska, an Outperform rating on United, and a Market Perform rating on American. Scarola rates Alaska, Delta, and United at Strong Buy; he has a Hold rating on American.

Alaska stock rose 2.5% on Tuesday, while American stock gained 5.7% and United rose 4.5%. The


S&P 500 index
rose 1.6%.

Airline stocks were slightly up on Tuesday after a federal judge struck down the government’s public transportation mask mandate. While the mask mandate had not curbed demand for travel, it could encourage more international travel as restrictions are lifted across the globe and travelers are more comfortable on long-haul flights, Syth said.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

.

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