The first airline to release first-quarter earnings could be the worst. Delta Air Lines ( DAL) Wednesday releases results before the start of trading, leading the parade of airline earnings to come over the next two weeks. Some of Delta's comments, especially with regard to fuel costs, ticket prices and low-cost competition, will be a harbinger of things to come at other carriers. But the carrier's company-specific issues -- namely deep losses, its falling credit rating and difficult contract negotiations with pilots -- will take center stage. Wall Street expects the company to lose $2.95 a share in the first quarter, a number that has been on the rise since March 15, when
Delta first warned that it would lose $400 million, worse than an earlier forecast of a $300 million to $350 million loss. At the time of the warning, analysts expected Delta to lose $2.51 a share, and in the month since, investors have punished the stock, dropping it 8.1%. As a result, much of the bad news is priced in and few analysts expect Delta's results to surprise. With CEO Gerald Grinstein negotiating pay cuts with pilots and working on a plan to overhaul Delta's business, due sometime in June, investors will be more interested in Delta's future than its quarterly results.
Few on Wall Street expect Delta shares to see much upside until this critical labor situation is either resolved or more guidance is given. "We do not hold high expectations for Delta equity over the near term, based primarily on unresolved labor costs that will likely play havoc on longer-term viability," said Daniel Hemme, analyst at Prudential Equity Group, in a note. "Its cost structure continues to place the airline at a competitive disadvantage and remains the chief culprit behind investor disinterest." Furthermore, with a new CEO at the helm and the
recent departure of company President Fred Reid to helm Virgin Airways' low-cost U.S. unit, Delta management will need a convincing plan to show Wall Street that it can become competitive again. Currently, only five analysts rate Delta a buy. Twice as many have a buy rating on AMR ( AMR), parent of American Airlines, and Continental Airlines ( CAL). "This June, Grinstein will present his findings to the board and at that juncture there could be an opportunity for a radical change," said David Strine, analyst at Bear Stearns, in a note. "Perhaps the only move left is to begin to shrink the company where losses are prodigious."
But after Delta's warning, Wall Street already expects the worst, which means there could be upside surprises in store. The few airlines expected to be profitable have seen their estimates clipped, while the rest have seen loss estimates deepen, due to the transcontinental fare wars and high cost of fuel. Over the last month, Bear Stearns has dropped its EPS estimates on the airlines it covers by 16%. In the month heading into the release of fourth-quarter numbers, the broker's estimates rose by 4%. "Within our coverage, we believe Northwest Airlines ( NWAC), Southwest Airlines ( LUV) and American have the greatest likelihood to beat the Street, although we are not expecting major surprises," said Strine. Indeed, Northwest, which releases earnings on April 21, is emerging as something of
a sleeper pick among analysts. While Wall Street expects the company to lose $3.20 in the first quarter, 30 cents more than four weeks ago, eight analysts rate it a buy -- the same as Southwest. Analysts are hopeful that the return of international travel can offset Northwest's high costs. In 2003, 22% of Northwest's revenue came from Asian routes over the Pacific, more than any other airline. In the first three months of 2004, Pacific traffic was strong, making double-digit percentage point gains due to easy comparisons with last year, when the SARS outbreak discouraged travel. While Northwest is best positioned to capitalize on the Pacific travel recovery, other network carriers may talk up their international results -- especially if competition over low-cost domestic routes keeps revenue and pricing weak.