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Airlines Poised As A Buy Following Delta's Earnings Release

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The cyclical airline segment could be lining up as a buy. Historically, the fourth quarter produces the strongest returns for airline stocks with an average gain of 8% since 1990, according to a recent WSJ article. This is due to analysts being increasingly optimistic in winter months pushing stock prices up in the last months of the year.

Delta Airlines (DAL - Free Report) kicked off Q3 earnings this week, giving us clues for what to expect in the remaining releases this month.

Delta’s Results

The world’s largest airline released its earnings before market open Thursday, October 10th, with mixed results. Delta just demonstrated not only the best sales since the company’s inception but its most profitable quarter.

DAL initially fell in morning trading on Thursday due to a slight miss on revenues and management guiding costs higher. Investors are concerned about rising costs due to a hiring expansion. According to CEO Ed Bastian, Delta was short of pilots and attendants last summer and wants to avoid this strain moving forward by hiring 6,000 new employees (900 pilots).

Delta's slight miss on revenue was due to some enthusiastic analysts who overstated the positive impact of the airline not flying the MAX and the market share that they would be taking. None the less, Delta did take a sizable amount of market share and grew its topline over 5% year-over-year with the primary drivers being its loyalty and premium offerings.

Falling gas prices substantially improved Delta's bottom line, and this is expected to spill over into all the other airlines' upcoming earnings. The large airline stocks have rallied since yesterday morning on the hopes that Delta's promising earnings is a signal of robust Q3 financials from the rest of the market.

Market Implications

The Boeing 737 MAX was the big market news this year, impacting every airline in one way or another. American Airlines (AAL - Free Report) said that this crafts grounding caused them to cancel thousands of flights and cost the firm roughly $185 million in its second quarter.

Delta took over as the global airline market leader following the Boeing MAX debacle. Delta didn’t fly any of the Boeing MAX planes, and its capacity was not affected when the aircraft was grounded. Delta was able to take market share from the former leader American Airlines.

The Boeing MAX's grounding continues to be extended, with its current expected fly date being January 16th. Once this aircraft is finally cleared for use, the capacity of the industry will significantly increase, shaking up the market.

Analysts have historically understated the summer quarter earnings, and I believe that this may be the case in the remaining 3rd quarter airline reports. Analysts may have overstated the market loss that each of these airlines experienced this past quarter, and a sizable upside may be in store in the coming month.

Take Away

American Airlines (AAL - Free Report) , United Airlines (UAL - Free Report) , and Southwest Airlines (LUV - Free Report) all report later this month. I expect to see some positive upsides in at least some of these reports. Analysts have slashed expectations, and it won’t take much to beat them.


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