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The Ratings Game: Delta Air’s profitable March and upbeat guidance boost airline stocks

A quarterly beat for Delta Air Lines Inc. coupled with the airline’s higher guidance and news that March was already a profitable month lifted shares of Delta as well as other major U.S. airlines on Wednesday.

Delta
DAL,
+5.88%

reported a better-than-expected first quarter and guided for second-quarter revenue to be close to 2019 levels.

Delta also spoke of a recovery in business and international air travel, which had been twin concerns for investors going into earnings day.

See also: Inflation and weak business and international travel are hurdles for major U.S. airlines as earnings season kicks off

“Revenue has accelerated as offices reopen and business travelers rebuild face-to-face relationships,” Chief Executive Ed Bastian told analysts in a call after the results.

“Demand for long-haul international is growing as travel restrictions lift led by the trans-Atlantic. To-date, we have not seen an impact to travel demand from the conflict in Ukraine, but we of course are monitoring this closely,” Bastian said.

Delta stock rallied 6% on Wednesday, with shares of United Holdings Inc.
UAL,
+5.37%

matching that advance and shares of American Airlines Group Inc.
AAL,
+9.89%

gaining more than 10%.

American Airlines stock, the best performer on the S&P 500 index
SPX,
+0.83%

on Wednesday, was on track for its highest close since Jan. 13, and on pace for its largest one-day percentage increase since Nov. 9, 2020, when it rose 15%.

Analysts at Bernstein, led by David Vernon, called Delta’s second-quarter revenue guidance “very strong,” as the company expects sales to be between 93% and 97% restored to second-quarter 2019 levels.

Related: U.S. airlines may find domestic travel acting as a cushion against the omicron variant, analysts say

“We believe the street was expecting unit revenue growth in the low single-digit range,” the analysts said.

Eventually, the focus for markets and travelers will be on how high air fares can go before demand starts to be impacted, they said.

“It is clear in the current market that consumers and business travelers are prioritizing air travel and absorbing higher fares, but it would be foolish to believe that this will continue at any price point,” the Bernstein analysts said.

“In our view it is less important to consider where the upper band on fares may be, but instead focus on whether there is enough rate and operating leverage in the model to restore profitability and begin meaningful balance sheet repair,” they said. “The early indications in reporting seasons are constructive in this regard.”

Delta is trying to keep up with “robust demand,” and higher fares are not “disrupting this pace so far,” Citi analyst Stephen Trent said in his note.

Delta executives said on the call they were aware of “broad concerns” about economic conditions in the U.S. in the second half of the year, but that demand remains strong and the airline is focusing on avoiding running out of seats, Trent said.

“Overall, the tone of the carrier’s results call was very encouraging,” he said. Trent kept his rating on Delta shares at buy.

MKM Partners analysts also took an optimistic view of Delta and the higher fares.

The airline “is having no issues pushing price as demand has surged back with leisure, corporate, and (international) all improving,” they said.

The company also talked about double-digit operating margins and free cash flow generation, “which is an encouraging sign that management views the demand recovery as a sustainable one and not just driven by the spring/summer season,” the MKM Partners analysts said.

American Airlines and United Airlines are slated to report first-quarter results next week.

Shares of the top 3 U.S. air carriers are in the red for the last 12 months, but their losses currently are slightly lower than the broader losses for the industry.

American Airlines stock is off 17% in the last 12 months, while Delta and United shares are down 15% and 21%.

That compares with a decline of 19% for the U.S. Global JETS ETF
JETS,
+4.94%
,
and contrasts with a 7% advance for the S&P 500 index.
SPX,
+0.83%

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