Delta Air Lines' (DAL) Q4 earnings that were released this morning were in many ways much more interesting than most such reports. The headline earnings number itself was sensational enough, with $1.1 billion of profit in the quarter. That equates to $1.70 per share, an easy beat of the $1.40 EPS analysts were expecting, but from a broader perspective the news is not all good. It seems that the biggest contributors to that bumper quarter were industry- or company-specific and there was a worrying trend beneath them.
Perhaps that is why, after an understandable initial jump of around five percent this morning, DAL started to pull back somewhat.
Perhaps the biggest contribution to the great numbers came from something that Delta didn’t do rather than something it did. The company has no Boeing 737 Max planes in service, so when most of its rivals such as American (AAL), United (UAL), and Southwest (LUV) were grounding planes and canceling flights, Delta was a big beneficiary. In that light, the 85.6% capacity utilization despite average ticket prices rising is not just less surprising, but also looks less sustainable.
The other big factor in the beat was a fourteen percent decline in fuel prices that added over $300 million to the bottom line. That is welcome and probably will be repeated when other airlines issue their reports, but it can’t be counted on to repeat in future quarters.
If you dig a little deeper into the substance of the release, however, there is an important lesson for investors, whether they own DAL and other airline stocks or not.
Delta does around two thirds of its business in the U.S., and business here was good, which was reflected in the strength of Q4 earnings. Results from their international operations, however, were disappointing. Revenue from European routes grew by less than one percent, while the numbers from Asia were actually down, mainly because of weakness in China.
That suggests that the 737 Max impact may be even bigger than it appears, as 737s are used more domestically, but it also hints that the weakness in global growth that many investors have moved on from is not over. If so, diversifying away from U.S. stocks into international markets may not be as obvious a play as it seems given the heady heights of the major domestic indices.
Traditionally, airline results are seen as a major indicator of the health of the economy. Travel is one of the first things that individuals and companies cut out when times are tough or the outlook is uncertain, so the industry’s decade of profitability confirms that the recovery from the recession is ongoing. On that basis, the news from Delta will be seen as welcome and a positive for the broader market.
That is understandable and there was some good news, for sure. Delta increased revenue on lower labor costs, for example, and leaner operations are always a positive. The 737 Max impact on these results is big though, and probably a one-off, while lower fuel costs cannot be relied on to repeat. And, if you see the beat as indicative of a strong U.S. economy, then you also have to see the international weakness as a problem.
The obvious conclusion is that DAL’s earnings may not be as good as they look at first glance, neither for the company in the long term nor the market as a whole. Investors should, therefore, temper their enthusiasm.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.