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Delta Shares Fell Due to Its Q4 2018 Revenue Outlook

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Updated

Lower revenue guidance

Delta Air Lines (DAL) shares fell 5.3% on December 4 after the company updated its fourth-quarter outlook. Although the airline’s bottom-line guidance was impressive, investors seemed to be disappointed with the downbeat revenue outlook for the quarter.

Delta expects its fourth-quarter revenues to increase nearly 7.5% YoY (year-over-year), which is lower than the company’s earlier guidance of an 8% increase. Delta expects the unit revenue to grow 3.5% YoY in the fourth quarter, which is towards the low end of the previous guidance range of 3%–5%.

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The company is optimistic about its bottom-line performance. Delta expects its cost control measures and a decline in fuel prices to lead to an expansion in its fourth-quarter pre-tax margin. Delta expects its EPS for the fourth quarter to be at the high end of its previous guidance range of $1.10–$1.30.

During Delta’s third-quarter earnings results on October 11, the company forecast the fourth-quarter pre-tax margin to be 9%–11%. In the fourth quarter, the cost per available seat mile is expected to be flat or down 1% on a YoY basis.

YTD share performance

Delta shares have been battered for most of 2018 due to overcapacity concerns and the rise in oil prices eroding profits. However, Delta shares suddenly gained momentum after it reported strong third-quarter results. Delta’s top and bottom-line results beat analysts’ estimates and marked a significant YoY improvement.

Delta’s latest quarterly performance reflected its ability to grow despite increased fuel costs. Oil prices rose continuously from the beginning of 2018 through early October. Since fuel prices have cooled off in the past six or seven weeks, investors are optimistic about increased profitability for Delta in upcoming quarters.

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Delta’s strong third-quarter results have been driving the stock higher. From October 11 until the end of November, Delta shares gained more than 22%. However, the disappointing revenue outlook for the fourth quarter might have made investors think that the company’s performance could lag its competitors. Later in November, Spirit Airlines (SAVE) raised its fourth-quarter total revenue per available seat mile guidance to 11% from 6% forecasted earlier.

Delta shares have risen 1.6% year-to-date, which makes it the third best-performing stock among US airline companies (JETS). With a return of 40.1% and 36.4%, Spirit Airlines and United Continental (UAL) are the two top-performing airline stocks. Southwest Airlines (LUV) and American Airlines (AAL) have lost 19.3% and 29.5%, respectively.

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