Airline Earnings Unlikely to Yield Upside

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Delta Air Lines, Inc. (DAL) kicks off earnings season for the airline carriers in Thursday’s pre-market, with analysts expecting earnings per share (EPS) of $2.25 on second quarter revenues of $12.46 billion. The company reported in-line results in April’s first quarter release, triggering a seven-week slide that found support at a two-month low. The downturn continued the stock’s choppy behavior since a multi-year uptrend stalled in the low $50s in the first quarter of 2015.


Delta stock is now trading just eight points above that peak, highlighting more than four years of sub-par returns, despite the current 2.37% forward annual dividend yield. And Delta isn’t alone, with American Airlines Group Inc. (AAL) and Southwest Airlines Co. (LUV) also posting losses or limp gains. Only United Airlines Holdings, Inc. (UAL) has escaped the force of gravity during this period, gaining about 5% per year.


Current financial headlines are misleading because they assert that airlines offer the only bright spot in the Dow Jones Transportation Average. As it turns out, the six airlines in this old-school instrument are equally divided between the upper and lower halves in component performance, while Amazon.com, Inc.’s (AMZN) new shipping division is reducing profits at packaging and trucking companies.


Airlines have raised fares and cut services in an effort to strengthen their bottom lines, but heavy competition and rising fuel costs have dampened profitability. An economic slowdown could make things worse, with declining passenger and cargo volumes exposing the weakest players to bankruptcy or takeovers, continuing a multi-decade march toward a cartel dominated by just a couple too-big-to-fail carriers.


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The NYSE Arca Airline Index (^XAL) has been battered and bruised over the years, plagued by multiple bankruptcies, mergers, and reorganizations. It posted an all-time low near 11.50 in 2008 and turned higher into the new decade, stalling in the low 50s in 2010. Two subsequent rally waves stalled in the low 120s in 2017, ahead of a failed 2018 breakout attempt. The index fell to a 52-week low in December and has underperformed badly since a bounce ended in February. 


The index has failed to mount 200-month exponential moving average (EMA) resistance since reaching that formidable barrier at the end of 2016. It is now sandwiched between that level and support at the 50-month EMA, highlighting a contracting range that will eventually generate a multi-year breakout or breakdown. Given the tenth year of an economic expansion and growing threats to globalization, it looks like smart money will be playing the short side.


TradingView.Com 

Delta Air Lines came public in its current incarnation in the low $20s in May 2007 and entered an immediate downtrend that posted an all-time low at $3.51 in March 2009. It completed a round trip into the IPO opening print in 2013 and broke out, posting a graceful series of new highs into the first quarter of 2015, when buying pressure eased in the low $50s. Price action since that time has tracked a shallow rising channel that places current resistance in the mid-$60s.


Channel support has aligned at the 50-month EMA, and there’s no reason to sell long-term positions unless: a) price action breaks support; or b) freed-up capital can be rotated into a more productive opportunity. On the flip side, a breakout above 18-month resistance at $60 should yield limited upside, with channel resistance likely to slow or stall progress while a buying spike above the upper black line favors more rapid upside development.



The Bottom Line

Thursday’s earnings report from Delta Air Lines will likely set the tone for the commercial airline sector, which is unlikely to post new highs for the rest of this economic cycle.


Disclosure: The author held no positions in the aforementioned securities at the time of publication.




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