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Delta, United And Other Airlines See A Positive Year Ahead, Despite Headlines To The Contrary

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Who knew that supposedly “expert” financial reporters and even some analysts – were such fans of Mark Twain?

Twain, a.k.a. Samuel Langhorne Clemens, and arguably the best storyteller in U.S. history, famously said “Never let the truth get in the way of a good story.” And a number of market reporters and news organizations on Tuesday followed Twain’s advice, reporting breathlessly that Delta Airlines is “losing $25 million a month” because of the government shutdown. In response worried investors dumped shares of the world’s second-largest and most successful airline.

Twain would have been proud that the facts, indeed, did not get in the way of that story.

Very little of what some of those financial journalists reported in this case was true, and investors who sold Delta shares based on those reports probably lost a little bit of money as a result.  Here, for the record, are a few of the facts NOT reported in the wake of Delta’s release of its 2018 financial results:

  • Delta is not “losing” $25 million a month because of the government shutdown (specifically because some government employees who otherwise would be traveling on business aren’t doing so while the government is in partial shutdown). As reported by Delta CEO Ed Bastian, Delta is foregoing about $25 million a month in revenue as a result of government travel not happening. But that’s a far cry from “losing $25 million” a month.  In financial reporting the term “losing” has a specific meaning that refers to the operating or net results line of a company’s profit/loss report.
  • Delta is, per its CEO’s disclosure, not collecting $25 million in revenue that it had expected to get based on its contracts to carry government employees and its experience doing so in past years. Were the shutdown to last a full year that would amount to about $300 million, which is not a totally insignificant amount of money. But, in the context of a company that last year reported taking in $44.4 billion in revenue that $300 million in unachieved revenue this year would go unnoticed in its year-end financial report because of the common practice of rounding reported figures.
  • Using Delta’s 8.85% net profit margin from 2018, that $25 million in foregone revenue per month from the shutdown would generate about $2.2 million in net profits monthly, or $26.5 million in annual profits. To the average person or small or mid-size business that’s a lot of money. To Delta, again, it’s a number that would be lost in the rounding of its reported net profits, which in 2018 totaled $3.9 billion.

In short, the hand-wringing in some published reports about the impact of the government shutdown on Delta and other airlines may say something about the erosion of financial reporting expertise brought about by the layoffs, downsizing and pay reductions resulting from the ongoing slow collapse of the journalism business, or it may be a sign of the subtle (or sometimes not-so-subtle) political views of journalists disposed to to look for negative news that can be blamed on the current occupant of the White House.

The facts, however, tell a different story.

For starters, Delta had a very good year in 2018, though down by some measures from 2017 and by most measures from 2015 and 2016.  Delta’s net profit in 2018 was up a notable 23%, but it’s operating profit, which arguably provides a truer picture of the company’s performance in the competitive marketplace, was off 12%.

Furthermore, while Delta officials did note that they expect the government shutdown to delay the airline’s ability to get its new Airbus A220 aircraft certified to fly, Bastian said that in 2019 Delta expects “to drive double-digit earnings growth through higher revenues, maintaining a cost trajectory below inflation, and the modest benefit of lower fuel costs.” That, he added, equals profit margin growth.

Somehow, however, that optimism from Delta’s CEO got reported in a headline at TheStreet.com as “Delta Tops Q4 Earnings Estimate, But Softer Guidance Sends Shares Lower.”  The  headline remained the same even after Delta shares ended up slightly on the day as investors eventually figured out that the real story is moderately positive.

CNN.com went even further with its headline “Delta issues another warning on earnings.”

That was a real head scratcher, to be sure. How did driving "double-digit earnings growth through higher revenues... ” get translated into “Delta issues another warning on earnings?”  Even if one assumes that Bastian was completely blowing smoke in order to hype Delta’s stock price – which he almost certainly was not doing - what he actually said is a very long way from being an "earnings warning." So why did Bastian even mention the shutdown/unachieved revenue issue? Perhaps the company's lawyers suggested that it was wise to formally disclose the "material" issue to make sure some disgruntled or opportunistic shareholder doesn't file suit against the company. Or maybe Bastian was trying to apply a bit of public pressure on President Trump and Congress to settle the political problem that is becoming a minor pain in the neck for airlines. Whatever his motivation, some in his audience made a much bigger deal of it than he likely intended.

Of course, the early reporting Tuesday about Delta’s supposed’ negative outlook was turned on its ear later in the day when rival United’s parenet, United Continental Holdings, issued its own 2018 financial results, which were surprisingly strong. United earned $2.1 billion last year on a net basis, and $3.3 billion in operating profits. Both figures were down from 2017 but beat analysts’ expectations. Furthermore, CEO Oscar Munoz predicted that the company’s earnings per share in 2019 will grow to between $10 and $12 a share, vs. 2018’s per share profit of $9.13.

United’s report, which was issued after the closing bell on Tuesday, sent airline shares up in overnight trading and morning training on Wednesday.   Year-end financial reports from the other top airlines, including American, the world’s largest carrier, and Southwest, which carries more domestic passengers than any other airline, are expected in the next couple of weeks.  Expectations among analysts are somewhat mixed because of rising labor costs and fuel price volatility, and mostly because of overriding concerns about the direction of the U.S. economy in 2019.  That’s because airlines historically have been regarded as leading indicators of an approaching downturn because as companies and individuals begin to reduce spending on the front end of a downturn or recession travel spending is among the very first cuts made. Currently there's no indication of that happening based on airlines' advance bookings.

But those concerns already are largely figured into airline shares’ current prices, so it would take some pretty strongly-worded negative comments about their prospects for 2019 to drive airline share prices way down in response to those upcoming earnings reports.

Given current worries among some, but not all investors and business leaders about a potential economic downturn airline analysts and investors appear in some cases to be hair-triggered to dump airline shares and to react negatively to virtually any news coming from the group of companies. That explains, in part, why airline shares fell sharply after reaching annual and multi-year peaks in late November.  That sentiment also likely figured into the initial, overblown negative reports on Tuesday stemming from Delta’s 2018 financial results announcement.

Delta shares, which lost nearly 20% of their value in December, closed Wednesday at $47.50, down 34 cents from Tuesday’s close but up 31 cents from Tuesday’s low immediately after the company’s profit report – and those erroneously negative headlines – went public.  United Continental’s shares closed Wednesday at $86.36, up $5.16 on the day and $6.37 from Tuesday’s opening price.

Investors currently are concerned that airlines’ ability to push fare and fee revenue higher – measured in cents per available seat mile – is weakening, meaning profit growth is slowing or, in a worst case scenario, turning negative. Continued growth of seating capacity among U.S. carriers is seen by some investors and analysts as exceeding the market’s ability to fill those additional seats at an equal or greater rate.  But both Delta and United officials on Tuesday sought to allay those concerns and took a more bullish approach to talking about their carriers’ prospects in 2019.

Delta president Glen Hauenstein said Delta's strong “brand momentum” was evident in the company’s “positive unit revenue growth in all geographic entities for the full year, a record revenue premium to the industry, and double-digit revenue growth from premium products and non-ticket sources.” He added that in the first quarter of 2019 Delta’s “unit revenue growth is expected to be flat to up 2% including impacts from the timing of Easter, increasing currency headwinds, and the ongoing government shutdown.”  He went on to predict that Delta’s total revenues in the first quarter will be up 4% to 6%.

Given the historical weakness of airlines in the first quarter, predicting such revenue gains should be understood as rather aggressive. But financial reporters and news organizations who initially reacted negatively to Delta’s report on Tuesday displayed either poor understanding of the subject matter, bias or both with their early negative reporting of the Delta 2018 results.  That does not mean that 2019 promises to be a record-setting year for Delta and other carriers. It likely won’t be. And U.S. carriers as a group do face significant challenges ahead like rising labor costs, fuel price volatility, weakening competitive positions in certain international markets as foreign carriers beef up service, and some degree of risk related to softening economies overseas or even at home.

But by any evaluation – and especially in comparison with the industry’s long-running history of boom-to-bust cyclicality – U.S. carriers today continue on an historic run of unprecedented profitability and success.  After posting a combined net loss for the industry’s entire history through 2011, U.S. carriers earned nearly $70 billion from 2012 through 2017. Total profits from 2018 likely will add around $15 billion to the total. And while no one currently is predicting that 2019 will be a record year for airline profits, most analysts expect U.S. carriers to do at least as well in 2019 as in 2018, assuming fuel prices don’t change dramatically in either direction.