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

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The top 3 U.S. airlines report first-quarter results in the coming days, with investors hoping to see more signs of a recovery in international and business travel, which have lagged domestic and leisure air travel, amid concerns that inflation headwinds could lead travelers to stay home.

Delta Air Lines Inc.
DAL,
+1.07%

is the first out of the gate, reporting its first-quarter numbers on Wednesday before the bell.

Analysts polled by FactSet expect Delta to narrow its adjusted quarterly loss to $1.26 a share, compared with an adjusted loss of $3.55 a share in the first quarter of 2021, and report sales of $8.8 billion, which would be a 52% rise from $4.2 billion a year ago.

Related: JetBlue’s ‘headscratcher’ bid for Spirit may be bad news for consumers, Wall Street says

Earlier Tuesday, American Airlines Group Inc.
AAL,
+0.94%

injected some hope that the major U.S. airlines could report a better-than-expected first quarter.

American boosted its sales expectations for the quarter, telling investors it expects quarterly revenue to be $8.89 billion, which would be down 16% from the first quarter of 2019.

That is “marginally positive” as compared with the company’s previous projection of a 17% decline, said analyst Stephen Trent with Citi. Trent expected quarterly revenue of around $8.77 billion.

American’s unit costs excluding fuel were “also a little better than expected,” he said.

American Airlines is slated to report its first-quarter results on April 21. The FactSet consensus calls for an adjusted quarterly loss of $2.41 a share on sales of $8.8 billion, which would compare with a loss of $4.32 a share on sales of $4.0 billion in the year-ago period.

Delta, American and United Airlines Holdings Inc.
UAL,
+0.73%

are still waiting for a full recovery in their business and international travel, said Peter McNally with Third Bridge.

“The leisure travel in the U.S. is definitely back … that is the part of the market that has recovered,” McNally said. Third Bridge does not expect a complete recovery for business and international travel until 2024, McNally said.

Operational costs are another worry, McNally said. “Costs are running well above” 2019 levels, he said.

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

United Airlines is expected to report its first-quarter results on April 20, with FactSet consensus forecasting an adjusted loss of $4.25 a share on sales of $7.7 billion. That would compare with an adjusted loss of $7.50 a share on sales of $3.2 billion in the first quarter of 2021.

On the plus side, their earnings reports are likely to show that the omicron variant of the coronavirus was not a big hurdle for air travel in the quarter, McNally said.

Analysts at B. of A. said in a recent note they expect “an upbeat earnings season” for U.S. airlines, given that strong pricing power has emerged and leisure travel remains healthy.

Moreover, revenue outlooks for the second quarter could surprise on the upside, the analysts led by Andrew Didora, said in a note to clients.

Delta is likely to be “bullish on summer demand,” the analysts said. Delta, alongside Southwest Airlines Co.
LUV,
+0.47%

and Alaska Air Group Inc.
ALK,
+1.19%
,
are the top airline picks for the B. of A. analysts, who rate these airlines’ stocks a buy.

The B. of A. analysts warned that the market could see a slight pullback due to inflation fears.

“Near term, consumers are facing inflationary headwinds and if these persist over a longer time horizon, we could see a pullback on discretionary spend such as travel,” they said. “We think a slowdown in consumer spend is the biggest risk to airline stocks.”

Shares of the top 3 U.S. air carriers are seeing red for the past 12 months, but are roughly in line with the broader losses for the industry.

American Airlines stock is off 26% in the last 12 months, while Delta and United stocks are down 21% and 24%.

That compares with a decline of 23% for the U.S. Global JETS ETF
JETS,
+0.83%
,
and contrasts with a 7.3% advance for the S&P 500 index.
SPX,
-0.34%

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