Consistent air travel demand is 'a new normal': Analyst

Delta Air Lines (DAL) managed to move ahead of industry turbulence, posting better-than-expected first quarter profits. Delta CEO Ed Bastian told Yahoo Finance that the company has seen the 11 highest sales days in the airline's history this year alone. Raymond James Managing Director Savanthi Syth joins Market Domination for an airline industry check-in.

Syth says the Delta report shows strong results and that any negative stock action on Wednesday is the market's reaction to macro concerns related to geopolitics and the inflationary picture. The consistency of demand for air travel demand constitutes a "new normal" in Syth's view: the demand is driven by leisure and visiting friends and relatives (VFR) travel but also by slowly recovering corporate travel in the tech and finance sectors.

Though Syth claims jet fuel prices have remained elevated, she considers them "manageable." She adds that jet fuel prices may strain capacity if demand can't bear the costs passed on to consumers. Still, the market demonstrates that consumers now value experiences more, so possible financial pullbacks may not impact travel, she adds.

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Editor's note: This article was written by Gabriel Roy

Video Transcript

JOSH LIPTON: Delta Air Lines managing to get past some of the turbulence in the industry as it posts a better than expected first quarter profit. CEO Ed Bastian spoke with Yahoo Finance and offered an upbeat outlook on the upcoming summer season.

ED BASTIAN: This year to date, we've seen the 11 highest sales days in our company's history. That's a strong predictor that spring summer season is going to be quite healthy on the travel side.

JOSH LIPTON: Here with more on the latest airline industry, check in is Raymond James, Managing Director of Savi, Syth Savi. It's good to see you. So it was interesting. So delta reported investors seemed they like what they heard. They bid up the stock. But now, we're actually down here about 2.5%. What did you make of the results, Savi?

I thought it was a really strong result both 1Q and 2Q outlook. And I think it's coming in better than expectations. I think the market today is reacting to more macro concerns with geopolitical issues and concerns about the Fed. But I think everything that delta had to say and what they're seeing has been very positive.

JULIE HYMAN: Savi, it's Julie here. What do you make of the consistency and persistence of demand for travel here? We had obviously the whole revenge travel idea that people were making up for lost time. Now, you would have thought they would have more than made up for it. Is this the normal level of travel that we can expect?

SAVANTHI SYTH: I do think that it is kind of a normal level coming here, Julie. And though on top of that, you do have some corporate travel that hadn't fully recovered. So a lot of the airlines that have exposure to big large kind of corporate travel are also benefiting from that, especially the tech and finance sectors haven't recovered.

And you're finally starting to see those sectors kind of coming back. They're still very low levels. But recovering well from those low levels.

So I think they some of that recovery, and then leisure, and VFR, visiting friends and relative travel seems to be just growing in a new normal here.

JOSH LIPTON: And Sava, what about jet fuel prices? I'm interested. What are the trends we're seeing there? And what does it mean for delta? But as well as other names in your coverage universe?

SAVANTHI SYTH: You just feel it has remained elevated. It's better than it was in 2022, and definitely even in 2023. But it's remaining elevated, but manageable.

And the biggest thing that airlines have in terms of being able to pass through those costs, if the demand can't bear it, then they have to adjust capacity. So if there is a move up in jet fuel, I would expect airlines to constrain capacity. Just off peak day flying. And pass that through usually with a three to six-month lag. You can see quite a bit of that pass through. And then within 12 months, it's fully passed through.

JULIE HYMAN: Savi, we got the hot inflation print today. Is there any danger that as customers are paying more higher prices, not necessarily for flights, but for other stuff, that they'll make different choices about travel, that there will be some kind of pullback?

SAVANTHI SYTH: I think what we've seen, and this is something we've seen even pre-pandemic, is that people have been valuing experiences more. And so I feel like the areas that they pull back is probably not travel. Now, they might decide to travel to different destinations.

But travel itself seems to be really important to people. And so I don't expect that to be an impact. And even talking about the fuel spike, I think, the risk is less about, are you able to pass it through?

But if it kind of turns into gives the economy pressure that runs into a recession. But beyond that, even in a kind of downturns, you've seen people willing to travel. And really the loss of travel that you see even in downturns is more businesses as they kind of tighten belts.

JOSH LIPTON: And Savi, you do have a strong buy on delta. What are the catalysts ahead that you think are going to move this stock even higher?

SAVANTHI SYTH: I think there's a lack of belief on the sustainability of earnings. And I think as you get further away, it's been a pretty rough kind of recovery coming out of the pandemic. There were a lot of false starts. Then you had a lot of operational issues.

And I think 2024 is really the first quote-unquote normal year that we're seeing for this group. So I think showing that you can hold on to that earnings, and even if they are kind of recessions or high fuel that just with a lag earnings are sustainable, I think that's going to be the key to really get this stock moving and getting a better multiple I think.

JULIE HYMAN: And then finally, Savi, we haven't talked about Boeing yet. But obviously, Boeing is very much on the minds of airline executives right now. It seems as though delta is not seeing a big negative effect. Who do you think is going to be most exposed, and who are we going to hear the most about it from in terms of the airlines this earnings season?

SAVANTHI SYTH: It, obviously, from a max specific issue of the biggest impacts are in the US space Southwest and United, but also Alaska. And you know, but it's not just-- I mean, Boeing is definitely having issues delivering. And Airbus is at least kind of now delivering to a slower lowered level of expectations, but delivering.

And then you have the GLTF engine issue. So think capacity is a problem for the market as a whole. But you're right from a Boeing specific standpoint, I think there are the airlines that are impacted more than delta at this point.

JOSH LIPTON: Savi, thank you so much for joining the show today. Appreciate it.

SAVANTHI SYTH: My pleasure. Thanks for having me.