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Delta's EPS Estimates Southbound: Time to Sell DAL Stock?
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Atlanta, GA-based airline heavyweight Delta Air Lines (DAL - Free Report) faces multiple headwinds ranging from the current overcapacity in the airline market, technology outage and high costs. Due to the headwinds, earnings estimates for not only the remaining quarters of 2024 but also for the current year are on the decline, signaling a bearish outlook for the airline. The Zacks Consensus Estimate for third-quarter and full-year 2024 earnings per share indicates a decline of 26.1% and 5% from the respective 2023 figures.
Image Source: Zacks Investment Research
Let’s delve deeper.
Overcapacity Likely to Hit Q3 Results of DAL
The airline market in the United States is currently characterized by overcapacity. This is expected to hurt the performance of airlines, including DAL, despite buoyant air travel demand this summer.
Carriers have been compelled to lower airfares despite an escalation in costs, thereby hurting profits amid the summer travel buoyancy. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors like DAL to follow suit to stay competitive. This has hurt pricing power, which is expected to dent third-quarter results.
DAL’s Revenue Loss Due to Global Outage
The global technology outage on Jul 19, caused by security software provider CrowdStrike’s (CRWD - Free Report) software update hit Delta the hardest among U.S. airlines. Following the faulty software update, DAL’s operations were crippled more than others due to its dependence on Microsoft (MSFT - Free Report) systems for flight crew scheduling. The faulty CrowdStrike software update affected solely Windows machines.
DAL management stated in a SEC filing that due to the outage, approximately 7,000 flights were canceled over five days, causing not only revenue loss but harassments to passengers. Management believes that the third-quarter direct revenue impact of the incident will likely be $380 million, caused mainly by refunds to customers for canceled flights and resultant compensation. Further impact for the September quarter, includes an increase in non-fuel costs to the tune of $170 million, primarily due to customer expense reimbursements and crew-related costs. The flight cancellations are likely to have lowered fuel expenses by $50 million.
Capacity growth for the September quarter is expected to have taken a hit of 1.5 points following the incident. We remind investors that while releasing second-quarter results, which was prior to the outage, DAL had projected available seat miles (a measure of capacity) in the September quarter to increase 5-6% from the year-ago actuals. Due to the loss caused by the outage, DAL is believed to be seeking compensation of at least $500 million from Microsoft and CrowdStrike.
DAL Stock Suffering From High Labor Costs
DAL is burdened with rising expenses related to non-fuel unit costs. These costs increased 1% year over year in first-half 2024, driven mainly by salaries and related costs, which increased 10%. The increase was due to higher wages arising from the contract with pilots that was ratified in March 2023. While releasing second-quarter results, DAL had expected non-fuel unit cost or cost per available seat mile (CASM: adjusted) for the September quarter to increase in the 1-2% band from third-quarter 2023 levels. The additional non-fuel costs due to the outage, as described above, are likely to push adjusted CASM higher in the September quarter, thereby hurting the bottom line.
DAL’s Price Performance Takes a Hit
Due to the headwinds mentioned above, shares of Delta have declined 14.8% over the past three months. DAL stock has underperformed not only its industry but also the S&P 500, of which the airline is a key member. Additionally, while DAL’s price performance compares unfavorably with that of American Airlines (AAL - Free Report) , it is a tad better than another airline heavyweight United Airlines (UAL - Free Report) in the same timeframe.
Three-Month Price Comparison
Image Source: Zacks Investment Research
DAL Stock’s Attractive Valuation: A Silver Lining
From a valuation perspective, DAL is trading at a discount compared to the industry. Its forward 12-month price-to-sales, a commonly used multiple for valuing airline stocks, reading is also below its median over the last five years. The company has a Value Score of A.
Image Source: Zacks Investment Research
Steer Clear of DAL
The negative sentiment surrounding the stock is quite evident, with earnings per share estimates for DAL moving south due to the reasons mentioned above. Investors have ample reason to be wary of investing in DAL stock currently.
As there is significant doubt about whether the challenges facing DAL will ease this year, investor sentiment surrounding this airline heavyweight is unlikely to get a boost any time soon. The combination of its weak current performance and an uncertain future casts a shadow over DAL’s prospects. So, the stock, currently carrying a Zacks Rank #4 (Sell), appears a risky prospect for investors.
Image: Shutterstock
Delta's EPS Estimates Southbound: Time to Sell DAL Stock?
Atlanta, GA-based airline heavyweight Delta Air Lines (DAL - Free Report) faces multiple headwinds ranging from the current overcapacity in the airline market, technology outage and high costs. Due to the headwinds, earnings estimates for not only the remaining quarters of 2024 but also for the current year are on the decline, signaling a bearish outlook for the airline. The Zacks Consensus Estimate for third-quarter and full-year 2024 earnings per share indicates a decline of 26.1% and 5% from the respective 2023 figures.
Let’s delve deeper.
Overcapacity Likely to Hit Q3 Results of DAL
The airline market in the United States is currently characterized by overcapacity. This is expected to hurt the performance of airlines, including DAL, despite buoyant air travel demand this summer.
Carriers have been compelled to lower airfares despite an escalation in costs, thereby hurting profits amid the summer travel buoyancy. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors like DAL to follow suit to stay competitive. This has hurt pricing power, which is expected to dent third-quarter results.
DAL’s Revenue Loss Due to Global Outage
The global technology outage on Jul 19, caused by security software provider CrowdStrike’s (CRWD - Free Report) software update hit Delta the hardest among U.S. airlines. Following the faulty software update, DAL’s operations were crippled more than others due to its dependence on Microsoft (MSFT - Free Report) systems for flight crew scheduling. The faulty CrowdStrike software update affected solely Windows machines.
DAL management stated in a SEC filing that due to the outage, approximately 7,000 flights were canceled over five days, causing not only revenue loss but harassments to passengers. Management believes that the third-quarter direct revenue impact of the incident will likely be $380 million, caused mainly by refunds to customers for canceled flights and resultant compensation. Further impact for the September quarter, includes an increase in non-fuel costs to the tune of $170 million, primarily due to customer expense reimbursements and crew-related costs. The flight cancellations are likely to have lowered fuel expenses by $50 million.
Capacity growth for the September quarter is expected to have taken a hit of 1.5 points following the incident. We remind investors that while releasing second-quarter results, which was prior to the outage, DAL had projected available seat miles (a measure of capacity) in the September quarter to increase 5-6% from the year-ago actuals. Due to the loss caused by the outage, DAL is believed to be seeking compensation of at least $500 million from Microsoft and CrowdStrike.
DAL Stock Suffering From High Labor Costs
DAL is burdened with rising expenses related to non-fuel unit costs. These costs increased 1% year over year in first-half 2024, driven mainly by salaries and related costs, which increased 10%. The increase was due to higher wages arising from the contract with pilots that was ratified in March 2023. While releasing second-quarter results, DAL had expected non-fuel unit cost or cost per available seat mile (CASM: adjusted) for the September quarter to increase in the 1-2% band from third-quarter 2023 levels. The additional non-fuel costs due to the outage, as described above, are likely to push adjusted CASM higher in the September quarter, thereby hurting the bottom line.
DAL’s Price Performance Takes a Hit
Due to the headwinds mentioned above, shares of Delta have declined 14.8% over the past three months. DAL stock has underperformed not only its industry but also the S&P 500, of which the airline is a key member. Additionally, while DAL’s price performance compares unfavorably with that of American Airlines (AAL - Free Report) , it is a tad better than another airline heavyweight United Airlines (UAL - Free Report) in the same timeframe.
Three-Month Price Comparison
DAL Stock’s Attractive Valuation: A Silver Lining
From a valuation perspective, DAL is trading at a discount compared to the industry. Its forward 12-month price-to-sales, a commonly used multiple for valuing airline stocks, reading is also below its median over the last five years. The company has a Value Score of A.
Steer Clear of DAL
The negative sentiment surrounding the stock is quite evident, with earnings per share estimates for DAL moving south due to the reasons mentioned above. Investors have ample reason to be wary of investing in DAL stock currently.
As there is significant doubt about whether the challenges facing DAL will ease this year, investor sentiment surrounding this airline heavyweight is unlikely to get a boost any time soon. The combination of its weak current performance and an uncertain future casts a shadow over DAL’s prospects. So, the stock, currently carrying a Zacks Rank #4 (Sell), appears a risky prospect for investors.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.