Delta Sparks Airline Rally After Travel Boom Bolsters Results

(Bloomberg) -- Delta Air Lines Inc. pushed industry shares higher after reporting surprisingly strong fourth-quarter results spurred by robust domestic demand.

Revenue from high-margin, business-cabin tickets and other premium products increased 9%, more than twice the pace of gains for coach fares, the carrier said in a statement Tuesday. Adjusted earnings came in at $1.70 a share, well above the $1.52 that was the highest estimate of analysts surveyed by Bloomberg.

As the first major U.S. carrier to report results, Delta provided a lift for an industry that’s been squeezed by the grounding of Boeing Co.’s 737 Max since last March. Delta, which doesn’t fly the model, has picked up some passengers from rivals. Airlines will face a new risk later this year as the plane’s potential return to service threatens to crimp fares by increasing the total seat supply.

While Delta didn’t issue an earnings forecast for the first quarter, elements of its report implied that profit could come in about $1.06 a share, according to Jamie Baker, an analyst at JPMorgan Chase & Co. That would exceed Wall Street’s expectations of 99 cents a share.

“We view Delta’s guide as an encouraging start to the year, one that should potentially allay the pessimism of those forecasting low-end outcomes,” he said in a note to investors.

The shares rose 4% to $61.88 at 12:08 p.m. in New York, after surging as much as 4.6% for the most intraday in nine months. Airlines were the second-best industry grouping in the S&P 500 Index.

Delta is “well on track to deliver full-year earnings per share of $6.75 to $7.75 per share in 2020,” Chief Financial Officer Paul Jacobson said on a conference call to discuss results, reiterating a target the company introduced last month. The carrier is providing only a full-year outlook after dropping quarterly updates.

Operating revenue rose 6.5% to $11.4 billion in the fourth quarter, while analysts expected $11.3 billion. In addition to strong ticket sales, Delta also cited lower fuel prices for its strong earnings as well as the December sale of a stake in Brazilian carrier Gol Linhas Aereas Inteligentes SA. The proceeds from the Gol stake added 9 cents a share to earnings.

South America

Delta dramatically expanded its South American footprint when it agreed in September to buy a 20% stake in Latam Airlines Group SA. The U.S. carrier will include results from the investment in financial reports starting this quarter.

“What we have seen has exceeded our expectations in the early days and we’re very optimistic that this is going to be a game changer for us in Latin America,” said Delta President Glen Hauenstein.

In the U.S., the carrier is betting on continued gains in demand, and plans to pump money into its Atlanta, Minneapolis, Detroit and Salt Lake City hubs.

Revenue for each seat flown a mile, a closely watched gauge of pricing power, will be flat to up 2% this quarter, Delta said.

The cost of flying each seat a mile is expected to climb as much as 3% this quarter. That will mark the fourth straight quarterly increase for the benchmark measure of efficiency. The carrier has said the yardstick may rise a full percentage point more than its long-term annual goal of no more than 2%, fueled in part by higher salaries.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

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