Delta Earnings: Postpandemic Wanderlust and Pinched Capacity Offer a Rare Opportunity for Airlines

No-moat Delta DAL reported passenger revenue 50% higher than the first quarter of 2019 on flight capacity essentially flat from that year (98.3%). However, the company’s (and the industry’s) operating costs have also swelled in the last three years, which suppressed profits in the quarter and disappointed investors who were expecting higher per-share earnings. We do not plan to change our $60 fair value estimate, and while we note that Delta’s shares are undervalued, we don’t believe the extraordinary tailwinds it is experiencing will persist indefinitely.

Delta’s strong bookings for the busy summer season and an improving cost picture in the second half of 2023 bode well for the rest of the year: Delta is working off the tail end of massive disruptions to its employee base and operations stemming from the pandemic, including training thousands of new employees and having renegotiated numerous supplier contracts, and it plans to refurbish its midwestern airport hubs in coming months. As a result, its cost structure should improve as those investments are completed and demand for travel remains very high, which results in higher-than-usual ticket prices because of constrained capacity.

You will hear more about what Delta management calls this “constructive industry backdrop”, which we would describe as a once-in-a-lifetime set of circumstances that we believe could provide airlines with a few years (but only a few!) of very strong results, as industrial hangovers from the COVID-19 pandemic collectively constrain airline capacity even as travelers continue to return to the skies in droves to fulfill pent-up travel desires.