No-moat rated Delta (DAL) reported considerably improved sequential revenue metrics as the airline benefits from the U.S. economy’s re-opening, but increased fuel costs and network rebuilding expenses, such as maintenance from bringing aircraft out of storage and training, weighed on profitability. We generally think these rebuilding expenses will be one-time expenses in Delta’s cost structure and continue to believe that Delta has permanently improved its cost structure due to pandemic-related restructuring. We are decreasing our fair value estimate for the firm by about 4.5% to $52.50 per share from $55 to account for Morningstar’s assumption of higher corporate taxes in the model and as we increase our near-term assumptions on fuel expense considerably to reflect higher oil spot prices.
Passenger revenues increased 94.3% from the previous quarter as Delta increased available seat miles 20.9%, passenger load factors 53.3% to 68.6%, and revenue yields by 4.8%. All three critical revenue metrics remain well below 2019 levels due to a lack of business travel and international travel. We’re expecting that business travel will be the next step in the recovery, as offices re-open. Management’s surveys of corporate clients indicate that over 93% of corporate accounts intend to increase travel volumes in the third quarter and that 57% of large accounts expect to return to pre-COVID-19 levels of travel no later than 2023. Finally, the percentage of accounts that indicated that they would never return to pre-COVID-19 levels of travel decreased from 8% to 5%. We think this survey data is quite optimistic regarding the return of business travel and provides a clear timeframe as to when the business travel recovery ought to start in earnest.
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