Delta Air Lines' (DAL) decision to reiterate its full-year outlook despite incurring an estimated $3.5 billion fuel headwind signifies its earnings resiliency and sets up the air carrier for a strong 2027, Deutsche Bank said in a client note emailed Monday.
The company last week reported better-than-expected second-quarter results amid robust demand and maintained its full-year outlook for per-share adjusted earnings of $6.50 to $7.50 and free cash flow of $3 billion to $4 billion.
In the earnings release, Chief Executive Ed Bastian mentioned Delta incurred its "highest quarterly fuel expense" in the airline's history. Fuel price surged 75% to $3.93 per gallon on an adjusted basis, pushing fuel expenses 77% higher annually to $4.41 billion in the second quarter. The company anticipates an all-in fuel price of about $3.15 per gallon in the current quarter.
Crude oil prices soared in the aftermath of the Middle East war, but retreated last month as the US and Iran agreed to a memorandum of understanding in June. However, recent renewed tensions between the two countries have seen prices resume their volatility.
Deutsche was "pleasantly surprised" by Delta reaffirming its outlook, especially taking into account what the brokerage estimates will be a fuel cost headwind of about $3.5 billion. "The reaffirmed outlook underscores the company's earnings resiliency and sets up for what could be a very strong 2027," analyst Michael Linenberg wrote in the note.
"The affirmation of our full year outlook from the start of the year and ability to grow earnings despite a nearly $4 billion increase in fuel cost reinforces that Delta's durability continues to improve relative to prior cycles and to the industry," Chief Financial Officer Erik Snell said during a Friday earnings call, according to a FactSet transcript.
The air carrier recorded adjusted operating cash flow of $4.1 billion and free cash flow of $1.4 billion through the first half of the year, after reinvesting around $2.6 billion in the business, according to the brokerage.
Delta continued to strengthen its balance sheet with adjusted net debt of $13.6 billion at the end of the second quarter, down $709 million from the end of last year, while liquidity stood at $7.7 billion, Deutsche said. The airline also announced a 15% hike in its quarterly dividend on Friday.
"We continue to view this combination of durable free cash flow generation, improving leverage, growing shareholder returns and disciplined capital allocation as supportive of sustained (return on investment capital) above cost of capital," according to Linenberg.
Deutsche reiterated its buy rating on Delta's stock with a 12-month price target of $105.
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