Airline Industry Earnings: To Buy Or To Wait?

I came across an interesting article that addressed Delta's upcoming earnings this Wednesday and the overall earnings predictions for the airline industry for this quarter.


Unit revenue, considered a key benchmark, measures how much money airlines take in for each passenger flown a mile. It has been declining throughout 2015 compared with year-ago periods, as airlines added more seats than there was demand for, and skirmishes between rapidly expanding discount carriers and big carriers resulted in fare-cutting.

Delta has been the best-performing of the three biggest U.S. airlines over the past several years. It is expected to report third-quarter profit of $1.35 billion, or $1.72 a share, on revenue of $11.1 billion, a sizable jump from the $357 million in profit on similar revenue a year ago.


Investors took heart earlier this month when the Atlanta-based company said it expected operating margins of 20% to 21% for the latest quarter, compared with initial guidance of 19% to 21%. It also said unit revenue would decline 4.5% to 5.5%, better than the earlier view that it could be down as much as 6.5%. In July, Delta said that by trimming its capacity in the second half of 2015, it hoped to return to flat unit-revenue performance by year-end.

Wolfe Research is dubious. The firm predicted in a recent research note that unit revenue for the industry could decline until at least the third quarter of next year. “It would be wildly optimistic to assume anything but negative” unit-revenue growth for Delta in the current fourth quarter, it said.

There are other potential clouds on the horizon. Delta hasn’t yet shed its hedging losses, having bet wrong on fuel’s direction in the past several quarters. The company has said it expects to incur about $200 million of hedge losses in the third quarter. Still, its third-quarter fuel price, factoring everything in, was $1.80 to $1.85 a gallon, comparing favorably with $2.90 a gallon a year earlier.

Delta, which had an industry-leading profit-sharing program, also made some recent changes that could trim those payouts. It increased base-pay rates for most of its workers by 14.5%, effective Dec. 1. Delta’s pilots, its only major unionized group, in July rejected a new labor contract offering them higher pay while also significantly cutting their profit-sharing program. Whatever is ultimately approved is sure to raise costs.

Key points:

  1. Unit revenue per passenger has been declining through 2015
  2. Rapidly expanding discount carriers have resulted in fare-cutting
  3. Delta expects better operating margins than initial guidance has suggested as well as less decline in unit revenue than expected
  4. Incorrect hedging of fuel prices has led to incurred costs of $200 million for Delta, but fuel costs are still much less than the year before
  5. As an industry leader Delta could be a good indicator of how this quarter's earnings cycle could be for the airline industry

What do you guys think, should you buy in now before earnings, or do you wait until the next quarter or even longer? What do you think Delta's earnings report will say?

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