Adjusted EPS of US$1.28 ahead of consensus; market concerns on lower guidance is overdone
- Adjusted 4Q23 EPS of US$1.28 outperformed street’s estimate
- Share price decline, stemming from management’s downward revision of full-year guidance to US$6-7 EPS, was overdone in our view
- Free cash flow outlook largely in-tact; greater emphasis on shareholder returns upon meeting leverage target should drive share price re-rating
Adjusted EPS of US$1.28 in 4Q23 outperformed street’s estimate. Delta reported adjusted EPS of US$1.28 in 4Q23 (compared to US$1.70 in 4Q19 and US$1.48 in 4Q22), surpassing consensus estimate of US$1.17. Total revenue reached US$14.2bn (+6% y-o-y) in the quarter, supported by higher passenger revenue (+12% y-o-y), partially offset by lower cargo revenue (-24% y-o-y) and other revenue (-19% y-o-y). The outperformance was driven by international travel demand that remained robust, in particular the Transatlantic routes saw 6% y-o-y increase in passenger yields, corporate travel that rebounded to around 90% of pre-pandemic levels, with some sectors that were initially lagging catching up, and premium cabin that achieved record load factors and yield growth that outpaced the main cabin. Total operating costs increased 8% y-o-y during the quarter, primarily due to higher staff costs on the new pilot contracts and higher maintenance costs on routine checks and industry-wide supply chain constraints. Delta generated free cash flow of US$2bn in the year and overall credit metrics continued to remain stable, with the group’s adjusted debt to EBITDAR at 3.0x as at end-Dec-23.
Share price decline, stemming from management’s downward revision of full-year profit guidance, was overdone in our view. The company’s share price reacted negatively to management trimming the group’s EPS projection to US$6-7 (prev: >US$7) and free cash flow to US$3-4bn (prev: >US$4bn) due to exogenous factors, including geopolitical challenges, volatile fuel prices and supply chain disruptions. However, we believe that management is just erring on the side of caution in an uncertain environment, and that the share price decline was excessive. Forward bookings for the upcoming summer season on Transatlantic routes have been robust thus far, with the group maintaining higher booked load factors and passenger yields. In addition, a notable trend that has emerged after the pandemic is the extended duration of the leisure travel season to Europe, spanning from March to October, which should be positive for Delta given its commanding market share on that route. On the domestic front, supply-demand dynamics are set to improve, which should mark a positive turning point for domestic unit revenues in 1Q24. Delta placed an order for 20 A350 planes to be delivered in 2026, with options for 20 additional widebody aircraft, supporting its capacity growth in the medium term. Looking ahead, management has guided for Delta to achieve EPS of US$0.25-0.50 in 1Q24 (compared to US$0.96 in 1Q19 and US$0.25 in 1Q23) on c.5% operating margin. The group remains confident in bringing down its adjusted debt to EBITDAR to 2-3x in FY24F and reaching its goal of generating US$10bn of free cash flow between 2023-2025, paving the way for it to return to an investment-grade credit rating. Upon reaching its leverage target, management has expressed its focus on dividend growth, which should support its share price.