Oil prices are high, summer thunderstorms are abundant, US airlines’ operations are impaired, and the transportation secretary is busy grandstanding, often at the airline industry’s expense. Nevertheless, carriers seem poised to report strikingly good second-quarter results.
The second quarter “could be the best earnings season for the airlines in years (decades?) Despite $ 4 fuel, which speaks volumes for the power of the demand recover,” Morgan Stanley analyst Ravi Shanker wrote in a report issued Friday.
“Mid-quarter updates from virtually all the airlines at conferences in June reinforced that the demand and yield strength that picked up after Presidents Day only strengthened, which helped offset jet fuel,” Shanker wrote. “The engine of growth has been driven by demand and yields (running ~ 25% above 2019 levels) rising unabated” until a few weeks ago.
On Wednesday, Delta will become the first carrier to report second-quarter earnings. Most others will report the following week.
American reported Tuesday that second-quarter revenue rose 12% from the same quarter in 2019, even though capacity declined 8.5% during the same period. Total revenue per available seat mile is expected to be up about 22.5% from second quarter 2019, ahea of previous guidance of a 20% to 22% increase. But cost per available seat mile rose 12%, compared with guidance of between 10% and 11%.
For the industry, the complete scenario is that airline operations were weak, due to summer weather and crew shortages. Financial results were apparently strong, as earnings calls will likely reveal. But Wall Street is focused on the current quarter. When the carriers make their current quarter projections, analysts will hang on every word.
Cowen analyst Helane Becker called the second quarter “A PR Disaster,” especially during the July 4th holiday, with its widely reported delays and cancellations, However, “We believe revenues were strong, led by higher air fares,” Becker wrote. But, she said, “We are more focused on September quarter guidance than actual June quarter results.
“We believe the second half of June saw a decline in forward bookings, which we are expecting heading into the fall,” said Becker. She advocated for continued capacity reductions. “This isn’t something the industry wants to do, but in an effort to get a handle on reducing delays, it makes sense,” she said.
Meanwhile Bank of America analyst Andrew Didora, who in March was early to spot “unsatiable leisure demand,” wrote on Thursday that “We have yet to see any meaningful cracks in demand, and we expect the same messaging this earnings season.
“We also think airline management teams will be realistic about the current macro environment by saying the post-Labor Day period is a big unknown with close in bookings becoming important as the traveler switches from leisure to corporate,” Didora wrote. “If demand slows, we think the industry can quickly cut capacity to meet demand.”
As for Delta, Shanker said it is his preferred legacy carrier. “We like Delta’s strong franchise, management team and network,” he wrote, noting that Delta “can benefit from a snapback in corporate and international.” He expects the carrier’s results to beat analysts’ consensus estimates.