Delta's results are further proof that the carrier is a winner, say analysts

By James Rogers

Delta is showing strength in a capacity-constrained environment, according to Melius Research

Delta Air Lines Inc.'s strong first-quarter results this week provided more evidence of the airline's strength in a capacity-constrained environment, according to Melius Research analyst Conor Cunningham.

The company's results are "further proof Delta is a winner in this backdrop," he wrote in a note this week.

Delta (DAL) delivered record first-quarter revenue, boosted by accelerating demand for business travel, while giving strong guidance. The company expects second-quarter revenue growth of 5% to 7%, compared with the FactSet consensus of 5.5% revenue growth.

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"There remains a massive dichotomy in the US airline industry - those that have a better grip on the operating environment and offer the right product in the right market perform leaps and bounds better than those that don't," Cunningham added. "That might seem obvious, but Delta's results (+$1.4 bn in FCF, only profit among major airlines in 1Q) and outlook speak to why they are a winner in a capacity-constrained environment."

Delta's cash generation is also allowing the carrier to further derisk the business through debt paydown, according to Cunningham. "As the focus for the industry starts to shift to the back half of 2024, excitement should continue to build as industry capacity growth moderates (potential downside) and comps only get easier," he added. "As airlines down the fare ladder rework networks and stabilize margins through price, it will only benefit Delta's margin outlook further." Melius Research has a buy rating and $56 price target for Delta.

The airline reported a first-quarter operating margin of 4.5% and is expecting a second-quarter operating margin in the mid-teens. "We anticipate continued strong momentum for our business," said Delta CEO Ed Bastian, in a statement accompanying the first-quarter results. Delta, he added, expects to deliver record second-quarter revenue.

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T.D Cowen raised its Delta price target to $55 from $49 Thursday. "We are updating our estimates for Delta to reflect 1Q24 results, 2Q24/FY24 guidance and management's latest commentary," T.D. Cowen analyst Helane Becker wrote in the note. "Delta continues to be our Top Pick for 2024."

Of 22 analysts surveyed by FactSet, 21 have an overweight or buy rating, and one has an underweight rating for Delta.

In the broader airline sector, T.D. Cowen expects that winter weather will weigh on first-quarter results. "We believe the quarter was affected by bad weather in the West and Midwest, rising fuel prices, and ongoing network restructuring in the domestic market," wrote Backer, in a separate note Thursday. "Investors will be focused on 2Q guidance and early thoughts for the summer, with a focus on international demand and non-fuel costs."

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Set against this backdrop, there could be potential negative surprises for American Airlines Group Inc. (AAL), United Airlines Holdings Inc. (UAL), Southwest Airlines Co. (LUV), Alaska Air Group Inc. (ALK), JetBlue Airways Corp. (JBLU), Hawaiian Holdings Inc. (HA), Frontier Group Holdings Inc. (ULCC), and Allegiant Travel Co. (ALGT), according to T.D. Cowen.

Delta's stock ended Thursday's session up 3.01%. The stock is up 41.04% in 2024, compared with the S&P 500 index's SPX gain of 9%, and the U.S. Global Jets ETF's JETS gain of 5.8%.

-James Rogers

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04-13-24 0621ET

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