Tag: Delta Air Lines

Airline Industry's Post-Pandemic Struggles: Why Delta Air Lines (DAL) Could Soar Above the Rest

Posted on by The INO.com Team

The global airline industry continues to face turbulence in its post-pandemic recovery. While pent-up travel demand has boosted passenger volumes, challenges persist. Soaring fuel costs, labor shortages, and disrupted supply chains have constrained capacity and inflated operational expenses. Adding to this complexity is the intensifying competition among carriers to attract price-conscious yet experience-driven travelers.

Delta Air Lines, Inc. (DAL), however, stands out as an example of resilience. Leveraging its diversified revenue streams and robust operational strategies, Delta has consistently outperformed its peers. Its focus on premium offerings and technology-driven innovations has created enduring competitive advantages, ensuring profitability and market leadership. With a strong financial foundation and forward-looking initiatives, Delta is uniquely positioned to thrive in the evolving airline landscape.

Delta vs. Industry: Comparative Performance

Delta has demonstrated an exceptional ability to recover faster than many competitors. The airline reported $14.6 billion in revenue for the September quarter of 2024, despite a $380 million revenue hit from an IT outage. This performance highlights Delta's operational resilience, as it managed to achieve a 9.4% operating margin for the quarter.

While competitors have struggled to balance demand recovery with overextended capacity growth, Delta's approach has been disciplined. The industry average capacity growth often exceeds demand, suppressing revenue per available seat mile (RASM). In contrast, Delta's measured 3-4% capacity growth planned for Q4 2024 aligns with market conditions, avoiding the pitfalls of oversupply.

Delta’s success also stems from its robust pricing power. The airline’s ability to command a unit revenue premium—+26 percentage points versus network carriers—reflects the value travelers place on its superior reliability, customer service, and premium offerings.

Operational Excellence: A Competitive Advantage

Operational reliability is at the heart of Delta’s success. As of September 30, 2024, Delta achieved 60 days of zero flight cancellations, a feat that underscores its industry leadership. Beyond reliability, Delta’s investments in customer experience have differentiated it in a competitive market.

Delta's commitment to premium travel is evident in its expanding lounge network. With over 700,000 square feet of lounge space across 55 Sky Clubs and three Delta One Lounges, the airline offers unparalleled amenities to travelers. The recently opened Delta One Lounges in Los Angeles and New York are tailored to premium travelers, enhancing their airport experience and reinforcing Delta’s position as a preferred airline.

In addition to these premium services, Delta's network optimization strategies bolster its efficiency. The addition of new routes from Austin, along with expanded partnerships with Aeromexico and Saudia, reflects its adaptability to shifting market demands. This network expansion enables Delta to capture untapped demand, particularly in international markets.

Financial Health: A Strong Foundation

Delta’s robust financial health sets it apart in an industry grappling with rising costs. The airline generated $95 million in free cash flow for Q3 2024, and adjusted debt to EBITDAR was 2.9x. Delta's balance sheet has been further strengthened by Fitch's upgrade to investment-grade status, placing it among the financially strongest airlines globally.

Delta’s financial strategy also focuses on diversifying revenue streams. Approximately 57% of its Q3 revenue was derived from premium products, loyalty programs, and cargo operations, reducing dependence on main cabin ticket sales. Notably, loyalty revenue, bolstered by Delta’s SkyMiles program and a $1.8 billion contribution from its American Express partnership, grew 6% year-over-year.

In addition to premium travel, Delta’s expanding cargo capabilities have provided another revenue stream. Cargo revenue surged 27% year-over-year in Q3, driven by strong international demand. This diversification not only buffers Delta against economic downturns but also positions it as a well-rounded industry leader.

Future Growth Prospects

Delta’s strategic investments in fleet modernization and global connectivity position it for sustained growth. The introduction of next-generation aircraft like the Airbus A350-1000 and A321neo enhances fuel efficiency and expands premium seating options. These upgrades are critical to capturing the growing demand for luxury travel.

International markets represent a key pillar of Delta’s growth strategy. The airline’s strengthened joint ventures with LATAM in South America and expanded codeshare agreements with Scandinavian Airlines System (SAS) enable deeper penetration into high-potential regions. Moreover, Delta’s expanding transatlantic routes, including seven new destinations in 2025, highlight its commitment to capturing demand for international travel.

Delta is also capitalizing on secular shifts in consumer preferences. Millennials and Gen Z, who increasingly prioritize experiences over possessions, are driving a surge in premium leisure travel. With a premium seat mix expected to exceed main cabin revenue by 2027, Delta is well-positioned to cater to this trend.

Investor Takeaway

Delta Air Lines presents a compelling investment opportunity in a challenging yet recovering airline sector. Its unmatched operational reliability, disciplined capacity management, and diversified revenue streams provide a foundation for sustained profitability. With an 11-13% operating margin projected for Q4 2024 and continued free cash flow generation, Delta stands out as an industry leader.

For investors seeking exposure to the airline sector, Delta’s proven resilience and ability to adapt to changing market dynamics make it an attractive choice. While risks such as fuel price volatility and geopolitical uncertainties remain, Delta's strategic initiatives and financial discipline significantly mitigate these challenges, offering strong potential for long-term growth.

Top Travel Stocks for the 4th of July

Posted on by The INO.com Team

As the 4th of July approaches, the demand for transportation services surges, driven by the nation’s eagerness to travel and celebrate. The American Automobile Association (AAA) expects 70.9 million individuals to travel 50 miles or more from home over the Independence Day holiday period, surpassing levels witnessed before the pandemic.

For the first time, AAA has analyzed the entire week of July 4th, including the Saturday before and the Sunday after the holiday. This year’s projected number of travelers represents a 5% growth compared to last year and an 8% increase over 2019.

“With summer vacations in full swing and the flexibility of remote work, more Americans are taking extended trips around Independence Day,” stated Paula Twidale, Senior Vice President of AAA Travel. “We anticipate this July 4th week will be the busiest ever with an additional 5.7 million people traveling compared to 2019.”  

The travel group projects a record 60.6 million Americans will travel by car the July 4th week, a rise of 2.8 million travelers compared to 2023. This year's figure also exceeds the 55.3 million people who traveled by car during Independence Day week in 2019.

The number of air travelers is also anticipated to reach a new record. AAA projects that 5.74 million people will fly to their July 4th destinations, marking an increase of approximately 7% year-over-year and a 12% rise over 2019. According to AAA booking data, domestic airfare is 2% cheaper this Independence Day week compared to last year, with the average price for a domestic roundtrip ticket at $800.

The increase in mobility presents a unique investment opportunity in the travel sector, particularly for companies such as Uber Technologies, Inc. (UBER), Southwest Airlines Co. (LUV), and Delta Air Lines, Inc. (DAL). These companies are strategically positioned to capitalize on the holiday rush through operational efficiencies, route expansions, and customer service innovations.

Here’s an in-depth look at why these stocks are attractive investments during peak travel seasons.

Uber Technologies, Inc. (UBER)

Valued at a market cap of $151.87 billion, Uber Technologies, Inc. (UBER) is a leading global ride-hailing company. It connects consumers with a wide range of transportation modalities, including ridesharing, carsharing, public transit, taxis, rentals, micromobility, and other modalities; it also provides riders with several vehicle types.

UBER’s platform leverages advanced algorithms and data analytics to match drivers with passengers efficiently. During peak travel times like the 4th of July, Uber’s dynamic pricing model ensures supply meets demand, optimizing driver availability and minimizing passenger wait times. This operational efficiency is crucial in managing the high volume of holiday travelers.

Features like upfront pricing, real-time tracking, and a robust safety protocol contribute to a seamless travel experience for Uber users.

Moreover, Uber continues to expand its service offerings and geographic reach. It introduced a shuttle service in the U.S. at its GO-GET annual event. The ridesharing company announced that Uber Shuttle users can now reserve up to five seats in advance on buses operating in high-traffic areas such as airports, concerts, and sports events. Uber will collaborate with local fleet operators for this service, utilizing vehicles with capacities ranging from 14 to 55 seats.

Notably, the company has increased its presence in key tourist destinations and expanded its ride options to include shared rides, luxury cars, and eco-friendly transportation, catering to a diverse customer base and enhancing its appeal during the holiday season.

For the first quarter that ended March 31, 2024, UBER’s gross bookings rose 20% year-over-year to $37.70 billion, with Mobility Gross Bookings of $18.70 billion (up 25% year-over-year). Its revenue increased 15% from the year-ago value to $10.10 billion. Its income from operations was $172 million, compared to a loss from operations of $262 million in the same quarter of 2023.

Furthermore, the company’s adjusted EBITDA grew 81.6% from the prior year’s period to $1.38 billion. Its free cash flow came in at $1.36 billion, an increase of 148% year-over-year.

For the second quarter of 2024, Uber expects gross bookings of $38.75 billion to $40.25 billion, representing 18% to 23% year-over-year growth on a constant currency basis. The company’s adjusted EBITDA is expected to be $1.45-$1.53 billion, representing 58%-67% year-over-year.

Analysts expect UBER’s revenue and EPS for the second quarter (ended June 2024) to increase 14.3% and 70% year-over-year to $10.55 billion and $0.31, respectively. For the fiscal year 2024, the company’s revenue and EPS are expected to grow 15.8% and 4.3% year-over-year to $43.18 billion and $0.91, respectively.

UBER’s stock is up around 14% over the past month and has gained more than 64% over the past year. Further gains could come with the July 4th rally.

Delta Air Lines, Inc. (DAL)

Delta Air Lines, Inc. (DAL) is a leading global airline headquartered in Atlanta, Delta, with a market cap of $30.61 billion. The company served over 190 million customers in 2023 – safely, reliably, and with industry-leading customer service innovation – and was recognized as North America’s most on-time airline by Cirium.

Delta Air Lines operates significant hubs and markets in Amsterdam, Atlanta, Boston, Lima, London-Heathrow, Los Angeles, New York-JFK and LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Santiago (Chile), São Paulo,  Seoul-Incheon, and Tokyo. The airline maintains strategic partnerships with Aeromexico, Air France-KLM, China Eastern, Korean Air, LATAM, Virgin Atlantic, and WestJet.

DAL’s extensive network and strategic alliances allow it to offer numerous direct flights, reducing layover times and enhancing passenger convenience. Thus, the company is well-positioned to capture a larger share of the holiday travel market and meet the increased demand effectively.

DAL’s operating revenue increased 8% year-over-year to $13.75 billion for the first quarter that ended March 31, 2024. Its adjusted operating income grew 17.2% from the previous year’s period to $640 million. Its adjusted net income and earnings per share were $288 million and $0.45, up 43.4% and 44.4% year-over-year, respectively.

As of March 31, 2023, the company’s cash and cash equivalents amounted to $3.88 billion, compared to $2.74 billion as of December 31, 2023. Its current assets were $11.58 billion versus $10.27 billion as of December 31, 2023.

After an outstanding first-quarter performance, Delta is expected to continue solid business momentum. For the second quarter of 2024, the company expects total revenue growth of 5%-7% year-over-year. Its operating margin is expected to be 14% to 15%, and earnings of $2.20 to $2.50 per share.

For the fiscal year 2024, DAL projects earnings of $6 to $7 per share. The company’s free cash flow is expected to be $3-$4 and adjusted debt to EBITDAR of 2x-3x.

Analysts expect Delta’s revenue and EPS for the fiscal year (ending December 2024) to increase 3% and 5.9% year-over-year to $59.77 billion and $6.62, respectively. Also, the company has topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

Shares of DAL have surged more than 16% over the past six months and nearly 17% year-to-date.

Southwest Airlines Co. (LUV)

With a market cap of $17.12 billion, Southwest Airlines Co. (LUV) is a prominent passenger airline company that offers scheduled air transportation services in the U.S. and near-international markets.

As of December 31, 2023, the company had a total fleet of 817 Boeing 737 aircraft and served around 121 destinations in 42 states, the District of Columbia, and the Commonwealth of Puerto Rico, as well as near-international countries, including Mexico, Aruba, Costa Rica, Jamaica, the Bahamas, Belize, Cuba, the Dominican Republic, the Cayman Islands, and Turks and Caicos.

Southwest Airlines is well-known for its low-cost, high-efficiency operational model. As a part of its birthday celebration, LUV announced a sale on flights starting as low as $53 one-way. Also, in May, the company introduced Cash + Points, a new flexible payment option for Rapid Rewards® Members. Southwest Rapid Rewards® Members can now use a combination of cash and points on hotel bookings.

The airline's flexible booking policies and extensive network of direct flights make it a preferred choice for many travelers. Southwest Airlines’ route expansion and new destinations are aligned with its strategy to capture the leisure travel market, which peaks during holidays like the 4th of July.

Southwest has consistently been recognized for its customer service, emphasizing a hassle-free travel experience. The airline is ranked first in customer satisfaction among economy-class passengers by J.D. Power for the third consecutive year.

During the first quarter that ended March 31, 2024, LUV’s passenger operating revenues increased 11.9% year-over-year to $5.71 billion. Its total operating revenues grew 10.9% from the prior year’s quarter to $6.33 billion. As of March 31, 2024, the company’s cash and cash equivalents stood at $8.37 billion, and current assets were $13.28 billion.

Street expects LUV’s revenue for the second quarter (ended June 2024) to increase 5.1% year-over-year to $7.39 billion. Similarly, the consensus revenue estimate of $27.69 billion for the fiscal year (ending December 2024) indicates an improvement of 6.1% year-over-year.

LUV’s stock has surged more than 6% over the past month.

Bottom Line

AAA projects a record of around 71 million people to make trips for the Independence Day travel period this year. UBER, DAL, and LUV are well-positioned to benefit from the increased demand for transportation services during the 4th of July. Their operational efficiencies, route expansions, and customer service innovations provide a strong foundation for capturing a larger share of the leisure travel market.

Given robust financial performances and bright growth outlooks, these stocks present attractive investment opportunities during peak travel seasons.

7 Historically High Performing Thanksgiving Stocks

Posted on by The INO.com Team

Amid mounting global challenges, it's essential to savor the lighter aspects of life. History shows a bullish trend during the holiday-shortened Thanksgiving week, fueled by increased consumer spending, the surge in holiday travel, and a lower cost of Thanksgiving spread.

Retailers anticipate robust sales during the festive week to turn over a profit for the year. Consequently, they offer discounts and attractive deals on overstocked items, seasonal goods, high-priced commodities, and holiday decor and gifts. Over the past decade, the retail sector has consistently surpassed the S&P 500 during this time frame.

2023 is predicted to witness a record-breaking holiday expenditure during November and December, indicating growth between 3% and 4% over 2022, snowballing the total spent from $957.3 billion to an estimated $966.6 billion. A 2023 Deloitte holiday survey suggests consumers are projected to spend an average of $1,652 during this holiday season, exceeding the pre-pandemic spending levels.

Despite witnessing a dip in October – its first in seven months – U.S. retail sales are expected to rebound. Despite economic uncertainties pressurizing customers, they prioritize holiday expenses during this year's shopping season and are looking for attractive deals and promotions to guide their expenditures.

Approximately 90% of shoppers planning to shop during the Thanksgiving break aim to visit a store to make purchases or collect an online order, with 84% planning to shop online.

Auto manufacturers were grappling amid the United Auto Workers strike. After successful negotiations with General Motors, October 30, 2023 marked the end of the strike. Kelley Blue Book reports that many car dealerships hoarding new vehicles due to fears of scarcity are currently dealing with an oversupply. The average dealership now boasts a 67-day supply of vehicles, although certain brands are still coping with undersupply. The swing in supply could generate lucrative deals for the holiday season.

The airline industry is bracing for the imminent holiday season, expecting record passenger volumes. The Transportation Security Administration projects a staggering 30 million passengers to be screened, potentially setting a new travel record. The pinnacle of this busy stretch is expected to be the Sunday following Thanksgiving, with approximately 2.9 million air travelers anticipated.

According to the Federal Aviation Administration, Thanksgiving flights could peak at 49,606 on the preceding Wednesday – a significant rise compared to last year's all-time high of 48,192. Many airlines are adequately prepared for severe weather conditions, having learned lessons from the previous year when they were compelled to cancel thousands of flights across the country due to adverse weather.

Thanksgiving continues to defy economic headwinds like rising inflation and dwindling consumer savings. Understanding the holiday's implications goes beyond recognizing it as a time for feasting and expressing gratitude; it is also crucial to comprehend its effects on stock market trends.

In the weeks leading up to Thanksgiving, the stock market traditionally experiences more substantial activity as traders recalibrate their strategies. Historically, the S&P 500 has closed the week on an optimistic note three-quarters of the time since 1961, with a median gain of 0.3%.

Furthermore, the S&P 500 has posted positive figures for the week two-thirds of the time, presenting investors with a median gain of 0.75%. Notably, amid the 2008 Global Financial Crisis, the S&P 500 reported an impressive 12% profit during Thanksgiving week.

This article will delve into the influence of Thanksgiving on various sectors like food, beverage, auto, e-commerce, and travel stocks. The seven stocks that could benefit from the holiday week are discussed below:

Amazon.com, Inc. (AMZN)

E-commerce behemoth AMZN is primed to reshuffle the deck of the festive commerce landscape. With a soaring 71.3% year-to-date gain, the company's performance deserves praise. The most recent earnings report depicts an impressive 12.6% revenue surge, hitting a staggering $143.08 billion. AMZN's efforts have been focused on more than just following the market trend, but indeed establishing it.

Market murmurs reflect the awe inspired by the company. Its impressive market cap exceeding $1.48 trillion, coupled with an energetic average volume of 52.49 million, reveals the momentum of AMZN this Thanksgiving.

In a period blossoming with high consumer activity, hundreds of millions of goods are purchased from AMZN. Thus, the company’s fourth-quarter results will provide Wall Street with a comprehensive snapshot of the festive shopping season.

Analysts expect AMZN’s revenue to increase 11.2% year-over-year to $165.85 billion, while EPS is expected to be $0.76, up significantly year-over-year.

Monster Beverage Corporation (MNST)

The Corona, California-based energy drink provider MNST maintains a consistent demand for its beverages, unfazed by frequent price uplifts. The third quarter’s profit surpassed expectations, catalyzed by increased energy drinks and hard seltzers prices.

A decrease in freight and aluminum can costs from the peaks experienced during COVID-19 has inadvertently facilitated the elevation of previously pressured margins.

As of May 2022, MNST beverages have reached the list of top-selling energy drinks in America. The company's momentum will likely persist as a dynamic array of product launches is forecasted to encourage stable growth. A profound distribution network across international markets and a focus on expanding opportunities bode well for future gains.

Bolstered by robust demand trends, sound pricing strategies, and continuous product development, MNST's resilience stands firm. Net sales for the 2023 third quarter increased 14.3% to $1.86 billion. Analysts expect MNST’s revenue and EPS to increase 16.3% and 36% year-over-year to $1.76 billion and $0.39, respectively.

General Motors Company (GM)

2023 is shaping to be a benchmark year for car consumers seeking year-end deals. An unprecedented converging scenario involving elevated inventory levels, significantly increasing interest rates, and traditional holiday discounts is navigating toward big discounts.

Annually, the holiday season witnesses an eruption of optimum offers from car dealerships. Conscious that consumers are more inclined to spend during the festive season, automakers and dealerships deliver enthralling promotions, markdowns, and exclusive deals.

Consequently, after years of observing these seasonal conventions, buyers expect bountiful year-end car discounts, often holding back on purchases until December to avail of them.

For November, GM offers notable cash rebates on various 2023 models. Buyers can expect up to $4,000 off the GMC Sierra 1500 and $3,500 off the Silverado 1500. On average, a rebate of around $1,500 is currently on offer across all GM models.

This tactic could pivotally steer the Detroit-based auto giant's fortunes upward as we enter the holiday season. Amid these developments, for the fiscal quarter ending December 2023, analysts expect GM’s revenue and EPS to be $39.58 billion and $0.97, respectively.

Delta Air Lines, Inc. (DAL)

As Americans traverse the nation to unite with their families during the Thanksgiving season, the holiday is anticipated to act as a definitive marker for the aviation industry's capacity to navigate the year-end festivity period despite facing hurdles of sustained deficit of air traffic controllers.

DAL, bolstered by its strong position, is primed to capture a sizable share of this travel surge. Boasting one of the most comprehensive domestic route networks within the continental U.S., DAL is optimally set up to accommodate these customers.

Being one of the four major carriers dominating over 60% of the U.S. aviation market, DAL persistently demonstrates robust bookings – a trend spearheaded by its premium offerings, which significantly eclipsed the main cabin reservations in recent quarters. Catering to premium passengers has successfully insulated DAL from some of the financial strains budget airlines have faced recently.

DAL projects to witness between 6.2 million to 6.4 million passengers this Thanksgiving, an increase of 5.7 million passengers the airline accommodated last year and is anticipated to surpass the 6.25 million passengers transported in 2019.

DAL emerges as a promising prospect for investors weighted towards capitalizing on dwindling oil prices and the future supply chain improvement. These factors stand to positively impact profit margins within the aerospace industry down the line.

For the fiscal quarter ending December 2023, analysts expect DAL’s revenue is expected to increase 3.9% year-over-year to $13.96 billion, while EPS is expected to be $1.14.

eBay Inc. (EBAY)

With over $20 billion in market cap, EBAY, an established e-commerce heavyweight, is tirelessly striving to attract its consumers' interest and spending power. Customers seeking automotive necessities, smartwatches, and Apple products can reap the benefits of up to 75% discount by commencing their shopping endeavors with EBAY this holiday season.

EBAY constantly refines its strategies to uphold its preeminence in an industry characterized by relentless evolution and revolution. As the holiday season looms, its performance is under intense scrutiny as never before, making its sales forecast a widely watched indicator in the e-commerce landscape.

For the fiscal quarter ending December 2023, analysts expect EBAY’s revenue and EPS to be $2.51 billion and $1.02, respectively.

Conagra Brands, Inc. (CAG)

CAG, a leading North American food company, stands to gain as the anticipated cost of this year's Thanksgiving meal is set to decrease.

American Farm Bureau Federation survey has revealed that the average expense of a conventional Thanksgiving dinner for 10 people in 2023 will be roughly $61.17, or under $6.20 per individual. This reduction is largely attributed to a 5.6% year-over-year decrease in turkey prices and notable reductions in the whipping cream and cranberries prices by 22.8% and 18.3%, respectively.

The declining grocery costs could lead to a sales uptick for CAG this festive season.

Moreover, preparing a Thanksgiving dinner also encompasses multiple stressors, including shopping, planning, and the actual cooking process. However, CAG's sophisticated meal-kit delivery service can eliminate two primary pressure points.

By delivering all the necessary pre-portioned and prepared ingredients required to prepare a mouthwatering meal directly to the customer's doorstep, CAG offers a solution for consumers to enjoy a stress-free holiday season.

For the fiscal quarter ending November 2023, analysts expect CAG’s revenue and EPS to be $3.25 billion and $0.68, respectively.

United Airlines Holdings, Inc. (UAL)

UAL anticipates a record-breaking surge in travelers this Thanksgiving holiday season, projecting significant revenue growth. The holiday travel period, defined as November 17 to November 29, sees the airline expecting to serve over 5.9 million passengers. This indicates a roughly 5% rise compared to 2019 and a significant 13% increment from last year's figures.

UAL plans to operate an average of over 3,900 daily flights to manage the increased traffic, translating to approximately three departures per minute. Therefore, the airline has introduced over 550,000 seats to accommodate high passenger volumes.

UAL attributes its heightened demand to the success of its basic economy pricing option. This economical ticket option allows UAL to compete effectively against rival ultra-low-cost carriers.

UAL’s third-quarter revenue from its basic economy rose 50% annually. UAL’s CEO Scott Kirby credits this substantial gain to the company’s “improved product.”

For the fiscal quarter ending December 2023, analysts expect UAL’s revenue is expected to increase 9.5% year-over-year to $13.58 billion, while EPS is expected to be $1.69.

Top 3 Stocks Investors Should Steer Clear From as Oil Prices Skyrocket

Posted on by The INO.com Team

The U.S. WTI Crude prices have escalated to the highest since August 2022, breaking the $95 per barrel resistance level. The international benchmark, Brent Crude, has hit a new record for 2023, beating $97 per barrel.

However, crude oil prices faced significant drops. Brent Crude decreased by nearly 12%, while WTI declined by almost 9%. The sudden crash was instigated by a report from the Energy Information Administration (EIA) citing weak U.S. gasoline demand, resulting in an abrupt shift in market sentiment. Tensions were exacerbated further by a bond market selloff, stimulating concerns about the future of the global economy and oil demand.

Despite the reduction, price levels remain high, potentially instigating economic challenges for industries closely tied to the energy sector.

However, before delving into the implications for related industries, a discussion regarding the reasons behind these unprecedented oil price levels is crucial.

According to the global energy watchdog, the International Energy Agency’s (IEA) Oil Market Report (OMR), global oil demand remains on track to rise by 2.2 million b/d year-over-year to 101.8 million b/d in 2023, fueled by rejuvenated Chinese consumption and increasing demands for jet fuel and petrochemical feedstocks.

According to Standard Chartered commodity analysts' data, the U.S. oil demand demonstrates resilience and outpaces previous forecasts – bolstering the assertion of burgeoning gasoline and jet fuel demands that align with household behavior patterns. The EIA projects an annual boost in initial gasoline demand of 98 kb/d.

Goldman Sachs predicts the persistent demand to culminate in a larger-than-anticipated deficit of up to 1.8 million bpd during the latter half of 2023 and a 600,000 bpd deficit in 2024.

Other factors influencing supply and demand dynamics revolve around OPEC+ and Russia’s orchestrated production cuts and extensive crude draws, suggesting a probable surge in oil prices. Unexpected supply disruptions from Angola, Libya, and Nigeria might enhance oil prices. These elements point to a robustly bullish forecast for the remainder of the year.

Industry analysts project the growing trend in oil prices to persist. Norwegian oil and gas firm Equinor’s chief economist anticipates global crude oil prices could reach $100 a barrel.

Data from the U.S. Energy Information Administration (EIA) unveils crude stocks at the Cushing, Oklahoma storage hub, which is the delivery point for U.S. crude futures, plunged by 943,000 barrels in the fourth week of September to less than 22 million barrels, the lowest since July 2022. This incited an energy price surge.

Although the oil prices have eased, they remain well above and potentially detrimental to numerous businesses. Industries such as air travel and cruise operators, which heavily rely on fuel derived from oil, bear the burden of these soaring prices. Potential consequences include less consumer travel due to escalating airline ticket prices, resulting in repercussions for businesses within the tourism sector. Additionally, profits may decline significantly for chemical companies that utilize large quantities of oil for products such as paint.

Therefore, investors may want to avoid the following three stocks until oil prices decrease more substantially:

Delta Air Lines, Inc. (DAL)

DAL provides scheduled air transportation services for passengers and cargo in the U.S. and internationally.

Crude oil is the predominant raw material for jet fuels and the lifeblood of airplanes. Jet fuel expenses, one of the most significant expenses for airlines, account for 10% and 12% of airlines’ operating costs. Hence, elevated oil prices increase jet fuel costs and can significantly impact the profitability and cash flow of DAL and other similar airline operators.

High oil prices can coerce airlines to compensate by inflating ticket prices or incorporating supplementary charges. Therefore, the interest in air travel, particularly for discretionary and leisure trips, could dwindle, resulting in a decreasing demand.

DAL’s CEO Ed Bastian previously cautioned that elevated oil prices and increased government regulations could catalyze a surge in ticket prices.

Moreover, DAL is known for delivering high-quality service backed by well-trained staff and a customer-centric approach. The company's commitment to uphold these standards and offer amenities inevitably influences ticket prices.

DAL’s oil refinery in Trainer, Pennsylvania, purchased in 2012, processes jet fuel, gasoline, and diesel. The airline company strategized to use this refinery as a hedge against fluctuating oil prices and costs related to jet fuel. However, the strategy was ineffective, as the refinery suffered losses amid maintenance challenges, pipeline disruptions, and unfavorable market conditions.

Moreover, as of June 30, 2023, DAL's adjusted net debt stood at $19.84 billion, marking a 1.3% increase year-over-year.

Recently disclosed quality issues with RTX’s Pratt & Whitney engines are expected to impact the U.S. carrier moderately. The problem arose due to a powder metal defect that may cause cracks in some components of the engines. Despite an initial estimation by RTX of repair work lasting 60 days per engine, it is expected to take up to 300 days.

DAL has trimmed its third-quarter operating margin and profit forecasts as Russia and Saudi Arabia’s extended oil production cuts amplified the airline's fuel expenditures. The carrier anticipates a third-quarter profit ranging from $1.85 to $2.05 per share, a drop from its earlier estimate of $2.20 to $2.50 per share.

Considering all these circumstances, it might be judicious to avoid DAL stock now.

Carnival Corporation & plc (CCL)

A leading provider of leisure travel services, CCL, operating a fleet of over 90 ships accessing nearly 700 ports, faces significant hindrances surrounding fuel costs due to rising crude oil prices. This scenario creates a negative backdrop for CCL and other cruise line operators, where the operational expense, mainly fuel, is expected to spike.

Passenger ticket surcharges are often a response to these inflationary trends. Considering this, CCL’s CEO, Josh Weinstein, indicated that a fuel surcharge is "certainly not off the table." However, this move might trigger a plunge in demand for cruises, particularly with the end of “revenge travel” and grappling with increased inflation. Cruise operators could see their profitability significantly impacted due to burgeoning oil prices, resulting in a notable hit to CCL’s bottom line.

As of August 31, 2023, CCL’s debt (current and long-term) stood at $31.30 billion. Moreover, despite high-ticket pricing driving CCL into third-quarter profitability and narrowing its annual loss forecast, the company anticipates a larger-than-predicted fourth-quarter loss. The predicted net impact of $130 million from advanced fuel costs and unfavorable currency exchange rates could eliminate most of the third quarter's ex-currency, ex-fuel $200 million outperformance.

Also, costs are projected to be further escalated by an assumed 18% rise in dry dock days for maintenance and repairs in 2024.

In 2024, the confluence of CCL taking ownership of three new vessels and a year marked by extensive maintenance could also add further financial strain. Despite potential offsets due to export credits, new capacity will lead to incremental costs and increased capital expenditures. Consequently, this surge in portfolio growth, together with the extended dry-dock days, would likely cut into the following year's free cash flow, even with robust demand.

Given the likelihood of reduced profit margins and dwindling demand due to inflated prices, it may be prudent to approach CCL cautiously.

Akzo Nobel N.V. (AKZOY)

Based in Amsterdam, the Netherlands, AKZOY is a global producer and seller of paints and coatings.

A key component in their production process is crude oil, which creates various elements such as solvents, resins, pigments, additives, and binders. As per some estimates, crude oil derivatives constitute about 40% of the total raw materials required for paint production.

Certain petroleum-based components are indispensable for specific paints or applications, making their substitution challenging without affecting the paint's quality or performance. A direct correlation exists between crude oil prices and the cost of manufacturing paint. Therefore, elevated crude oil prices present significant challenges to paint companies.

Increased oil prices increase the production costs for paint manufacturers, resulting in diminished profitability and growth opportunities for these companies.

Paint companies often transfer these costs to their customers to cope with inflated input costs. However, high prices can negatively affect paints' demand and sales volume, especially in a fiercely competitive market.

AKZOY is experiencing this challenge, making it a potentially less attractive stock option. The company could suffer substantial negative impacts due to lower housing starts in the U.S. and Europe’s weak economic growth.

The company's revenue dropped by 3.9% year-over-year in the second quarter of the year. Furthermore, the Net Debt/EBITDA or leverage ratio for the year's first half increased to 4x, compared to 3.2x during the prior-year period. Higher oil prices are forecasted to decrease its operating income this quarter significantly.

Therefore, these stocks could be best avoided now.

Clear Skies Ahead? Can US-China Flights Propel 3 Airliners for Takeoff?

Posted on by The INO.com Team

With the pandemic firmly in the rear-view mirror, consumers are ever keener to redeem their pile of airline miles on other travel rewards on their credit cards for new experiences through “revenge travel.” Revenge travel has its origins in “baofuxing xiaofei” or “revenge spending,” an economic trend that originated in 1980s China when a growing middle class had an insatiable appetite for foreign luxury goods.

Since e-commerce, albeit with a few hiccups in the supply chain, was able to satiate the appetite for goods through the pandemic, Americans are now going above and beyond to compensate for the years spent indoors trying to substitute real experiences with virtual ones.

The trend is expected to gain further momentum with the relaxation of restrictions on international travel that were put in place by China as part of its strict and controversial “Zero-Covid” policy. Consequently, air traffic between the U.S. and China is expected to double in volume by the end of October.

According to an order by the U.S. Transportation Department, each country will gain an additional six weekly round-trip flights as of September 1, up from the current 12, with the total number of flights for each nation planned to rise to 24 by October 29.

In this context, here are three U.S airlines that stand to benefit the most from the persistent tailwind:

On July 13, Delta Air Lines, Inc. (DAL) reported record revenues and earnings for the fiscal second quarter driven by strong demand for international travel, premium seals, and a 22% decline in fuel expenses. The Atlanta-based airline’s adjusted revenue and EPS came in at $14.61 billion and $2.68, compared to consensus estimates of $14.49 billion and $2.40, respectively.

Given that airlines conduct the bulk of their business in the second and third quarters, DAL hiked its 2023 earnings forecast to an adjusted $6 to $7 a share, up from its previous estimate at the high end of a $5 to $6 per share range.

United Airlines Holdings, Inc. (UAL) has also been on a purple patch which has seen the carrier posting record quarterly earnings and forecast a strong third quarter amid an unprecedented domestic and international travel boom.

The carrier’s total revenue came in at $14.18 billion, compared to consensus estimates of $13.91 billion. Its net income came in at $1.08 billion, which resulted in an adjusted EPS of $5.03 for the quarter that surpassed Street expectations of $4.03.

International flights made up 40% of the revenue, but the segment is growing faster than domestic ones amid the overdue relaxation of strict Covid restrictions overseas. 

Despite ten consecutive interest-rate hikes by the Federal Reserve, it isn’t difficult to connect the dots and understand why American Airlines Group Inc. (AAL) has had to turn to bigger airplanes, even on shorter routes, and jumbo-jets, such as the Boeing 747 and the Airbus A380, are being brought back to help ease airport congestion and work around pilot shortages.

As a result of this tailwind, AAL’s revenue for the fiscal second quarter topped analyst estimates to come in at a record $14.06 billion, up 4.7% year-over-year. With the airline’s executives bullish on travel demand, particularly for international trips, the operator has raised its earnings outlook for the fiscal year 2023.

Dark Clouds Around the Silver Lining

“If something cannot go on forever, it will stop.” The obviousness of this observation made by Herb Stein was what made it famous.

Amid widespread convictions that pent-up demand for travel will be a multi-year demand set, it is easy to get carried away by the “pent-up demand” and “revenge travel” narrative.

However, the rise of remote work and virtual teams, facilitated by contemporary collaboration and productivity tools, seems to have become an immune and immutable remnant of the cultural sea-change our work and lives had to adopt and adapt to during the pandemic, new reports give us reasons to doubt whether business travel is ever going back to normal.

In such a situation, with traveling for leisure being an occasional indulgence in most of our lives, there are risks that the pent-up demand might not be enough to sustain the momentum that is propelling the growth performance of DAL and other airlines, which are primarily in the business of ferrying passengers.

Moreover, with ticket prices at all-time highs and the stash of pandemic stimulus cash, fueling the leisure travel boom expected to run out over this quarter, it is unsurprising to find tricks and trends, such as ‘skip-lagging’ and consumers trading down on travel being on the rise.

Across the Pacific, with the Chinese economy currently battling triple threats of deflation, chronically high youth unemployment, and an ever-intensifying real-estate debt crisis, it could be unrealistic to expect any appreciable recovery in overseas travel demand among the aging, shrinking, and deurbanizing Chinese population that’s holding on to its savings for dear life amid macro-economic uncertainties that could bring about a lost decade.

Moreover, geopolitical relations between the U.S. and China have been souring because of differences regarding the latter’s territorial claims. The trade war between the two superpowers is intensifying amid restrictions on exports of semiconductor chips and investments in other cutting-edge technology by the former, and the latter upping the ante won’t help matters either as far as civil aviation between the two countries is concerned.

Bottomline

While U.S. air carriers and their Chinese peers would want nothing more than for passenger demand to stay strong and, perhaps, keep growing, the most likely case would be a return to seasonality and cyclicality, as is typical of the airline industry.

However, the possibility of passenger demand falling off a cliff and investors rushing for the exits only to find that the clock struck midnight and the chariot turned back to a pumpkin can’t be completely ruled out.

Either way, every flight that takes off has to land at some point. However, amid widespread tail risks, investors, both current and prospective, would be wise to fasten their seatbelts because the skies ahead are anything but clear.