Here’s What Delta Air Lines Big News Means for Investors

The devil is in the details. Despite some mixed headline numbers from Delta Air Lines’ (DAL 0.31%) latest investor update, one aspect of management’s comments is bullish for the company and much of the industry. Here’s a look at what management is saying and why you might feel more comfortable holding the stock after that.

Numbers with mixed titles

For those investors unaware of the events of the summer, airlines have experienced flight delays and cancellations due to CrowdStrike software update that crashed Microsoft operating systems. Delta Air Lines was hit particularly hard, impacting revenue and earnings lines.

Investors should keep the impact (hopefully a one-time issue) in mind when evaluating the company’s third-quarter performance and full-year guidance. In doing so, it is clear that two of the three key operating values ​​that the airline is guiding towards align with previous guidance; but one, fuel-adjusted cost-per-seat-mile available (CASM-Ex), is slightly disappointing.

The table below shows that the midpoint of the implied guidance excluding CrowdStrike (fourth column) is 3%, the same as the guidance given in the Q2 earnings presentations. Similarly, the default guidelines, excluding CrowdStrike, are similar for available miles.

However, the default guidance for CASM-Ex is higher than the previous estimate. While a difference of 2.5% versus 1% to 2% may not seem like a big deal, it is a closely watched number in the industry, and rising CASM-Ex will reduce profit margins.

Image source: Getty Images.

This is one of the reasons why the stock initially sold off after the recent trading update at the Morgan Stanley Laguna Conference. The other reason is that management told investors that its full-year earnings per share would be in the middle or above its initial guidance of $6 to $7, excluding the $0.45 impact from CrowdStrike.

Overall, core earnings guidance at the midpoint of previous guidance, but with costs (CASM-Ex) rising more than expected, it is slightly negative overall.

Data source: Delta Air Lines presentations. YoY is year over year. Bp is basis points where 100bp=1%.

Why investors should enjoy the update

As mentioned earlier, the trading update was very positive and helped derisk the stock. I am referring to management’s discussion of capacity reduction in the industry.

This is a huge deal in the industry and strikes at the heart of the bull-and-bear debate over stocks like Delta Air Lines. Bears see an industry traditionally plagued by cycles of rapid capacity expansion as travel demand improves and ticket prices rise, only to see profits fall as demand falls and airlines hold on with stubborn capacity reductions.

Image source: Getty Images.

As such, when the industry moved into overcapacity in the summer, the bears jumped to catch the salmon, while the bulls fell asleep in the corner, grimly muttering that this time would be different. Airlines would be disciplined enough to cut unprofitable capacity.

A red flag waving at the bull

The excellent news is that Delta President Glenn Hauenstein told investors that the summer overcapacity “started to resolve in August and is heading into the fall peak season” and Delta had “unit revenue inflections in two of our largest entities, “namely domestic and transatlantic routes. In plain language, Delta’s per-available seat-mile (RASM) revenue growth is increasing, which means the overcapacity problem is improving.

Moreover, investors can take heart from his comment United Airlines (Ul 2.23%) CFO Mike Leskinen, at the same conference, when he pointed out: “We expected a positive inflection in RASM and domestic and Atlantic in August. I saw this. We spoke very proactively and positively about what was going to happen in September, a continuation of this trend. We see that.

Image source: Getty Images.

What it means for investors

In short, the commentary from Delta and United suggests airlines they have has taken a disciplined approach in reducing unprofitable capacity, which improves RASM for both airlines. Moreover, if this pattern of behavior reflects a new normal in the industry, high-quality carriers like Delta could be on a long-term growth path.