Delta's Q3 results to reveal consumer health

Friday's spotlight falls on airlines, with investors seeking to learn whether US consumers are still willing to book flights despite griping about prices. Airline shares have turned in surprisingly strong performances this year even as fuel costs and interest rates have acted as significant headwinds.

The central question as Delta gets set to report its third-quarter results before Friday's opening bell on October 9 is whether consumer strength persists. The company's conference call is scheduled for 10 am ET, and that session will be closely watched for indications of how much additional pricing power the airline has.

Although the summer travel season has ended, baby boomers are increasingly opting for trips during shoulder periods, and corporate travel demand is reported to be robust. The key question now is whether demand will remain solid through the holiday season and whether carriers can continue to pass on higher fuel costs without seeing empty seats.

In July, Delta's management established a high revenue target, projecting mid-teens year-over-year growth on the back of modest capacity expansion, with revenue per available seat mile showing sequential improvement. The airline also provided guidance for adjusted earnings of $2.00–$2.50 per share and an operating margin of 11–13%. At that point, executives indicated that booking trends provided a constructive backdrop for continued strength into the December quarter.

That particular assertion is what the upcoming report will put to the test.

For perspective, Refinitiv estimates cited this week project adjusted earnings of $1.75 per share, beneath the company's initial guidance range. This implies that investors have already factored in some profit pressure. Consequently, any backward-looking earnings shortfall would have to be evaluated alongside Delta's outlook for the next three months. Here are some key figures to monitor:

• Adjusted EPS for Q3 is estimated at $1.75, compared with $1.71 a year earlier and management's projection of $2.00–$2.50.
• Revenue for Q3 is seen at $17.671 billion, up 16.3% year over year, versus the company's guidance of $17.325–$17.629 billion.
• Q3 EBITDA is estimated at $2.381 billion, versus $2.309 billion in the same period last year.
• Q3 EBIT is projected at $1.700 billion, below management's guidance range of $1.906–$2.292 billion.
• For Q4, the consensus calls for EPS of $1.32 on revenue of $17.326 billion.
• Full-year consensus EPS stands at $5.33, well below Delta's guidance of $6.50–$7.50.

Fuel remains the clear wildcard. Delta's July guidance assumed a total September-quarter fuel cost of roughly $3.15 per gallon, derived from the forward curve as of July 2 and incorporating a modest refinery benefit. That makes the revised assumption for the December quarter especially critical.

The focus will be on how much of the fuel cost increase Delta anticipates recouping via ticket prices, the speed of that recovery, and whether the airline's margin guidance depends on lower energy prices. Additionally, CEO Ed Bastian stated in an October 6 interview that "there's no slowdown in sight" on the booking curve, noting that 95% of Delta's revenue comes from households earning at least roughly $100,000 annually.

Regarding demand, more specific detail is needed beyond a comforting top-line statement on bookings. Are Thanksgiving and Christmas holiday flights filling up at higher fares? The passengers traveling during those periods tend to be less wealthy. Are customers reserving closer to the departure date, opting for cheaper options, or showing greater sensitivity to discounts? Is the strength evenly distributed across domestic leisure, international travel, and corporate accounts?

Delta's premium segment also warrants scrutiny. Premium revenue increased 17% in the June quarter, but the implications will be more compelling if standard main-cabin passengers are proving resilient alongside those purchasing higher-priced tickets.

From a market perspective, strong bookings and a believable fuel-cost recovery would bolster the argument that household spending retains its momentum. Weaker demand combined with persistent fuel expenses would be a far less favorable scenario.

Regarding the stock performance, Delta shares have been unexpectedly robust in 2024, climbing 20% year to date compared with a 3.5% decline for United and an 18% drop for American. The market's response to the report will be telling.