Delta Air Lines, one of the leading carriers in the United States, is set to unveil its earnings before Thursday's opening bell. Market analysts and shareholders alike will be watching closely, with two key concerns taking center stage: demand and fuel costs.
The Numbers
For the third quarter, Delta (DAL) is expected to report earnings of $1.95 per share, a significant increase from $1.51 recorded last year. Moreover, estimates suggest that quarterly revenue will reach $14.5 billion, marking a noticeable rise from $12.8 billion in the previous year.
Demand: A Crucial Factor
One burning question revolves around demand for air travel. As summer comes to an end and inflationary pressures lead to higher fares, will customers feel discouraged from flying? With travelers feeling the squeeze, it remains to be seen whether Delta expects a drop in demand.
Fuel Costs: A Rising Concern
Another significant aspect to consider is fuel costs. In recent weeks, oil prices have been steadily increasing, and they surged even further over the weekend following the Hamas attack on Israel. Will this ongoing conflict keep oil prices at elevated levels for the upcoming quarter? Perhaps even for the next year?
Exploring New Possibilities
Beyond the traditional concerns surrounding fuel costs, another trend has emerged – one that may prove beneficial to airlines in the long run: weight-loss drugs. While food stocks have been impacted by this trend, airlines could potentially reap the rewards. With billions of dollars spent annually on fuel, the amount correlates to the weight of the planes. Innovative drugs such as Ozempic and Wegovy, manufactured by Novo Nordisk (NVO), have the potential to reduce these expenses significantly.
As Delta Air Lines prepares to release its earnings report, all eyes will be on these critical factors – demand and fuel costs. A thorough analysis of these aspects will provide valuable insights into the airline's performance and its position within the industry.
Fuel Efficiency and Weight in the Airline Industry
Analysts at Jefferies emphasize the crucial role that weight plays in achieving fuel efficiency in the airline industry. Airlines are constantly seeking ways to reduce weight and cut costs, as there is a direct correlation between the weight of an aircraft and the amount of fuel required for flights.
For instance, United Airlines (UAL) could potentially save an impressive $80 million per year, accounting for almost 1% of their overall fuel expenses, if the average passenger weight were to decrease by just 10 pounds. Sheila Kahyaoglu, an analyst, suggests that this cost reduction would translate to approximately 20 cents of earnings per share on an annual basis. Although this example pertains to United Airlines, the Jefferies analysts believe that similar benefits could be recognized by other airlines.
While the impact of obesity drugs may not be reflected in Delta's financial numbers, analysts could rely on the airline for further information. These medications have been a hot topic during the ongoing third-quarter earnings season. Notably, PepsiCo (PEP), a food company, released its earnings report on Tuesday.
However, the primary focus remains on the rising fuel costs due to the recent surge in oil prices and the future demand for flights in the coming months.
In a recent analysis, Citi analysts identified Delta and United as the strongest among the four major U.S. carriers (Southwest and American being the other two) based on their current demand trajectories. Citi reaffirmed Buy ratings for Delta and United but adjusted down their price targets for all four stocks.
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