The second largest U.S. airline
Delta Air Lines Inc.
) reported second quarter 2012 adjusted earnings of 69 cents per
share. The quarter's earnings were a penny ahead of the Zacks
Consensus Estimate thanks to falling fuel prices, fare hikes and
the ongoing cost-cutting measures.
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Adjusted net income excludes $561 million of fuel hedging losses,
$171 million of severance costs and $22 million of cost related to
other streamlining actions. Including these charges, Delta reported
a loss of 20 cents in contrast to earnings of 23 cents in the
Revenue increased 6% year over year to $9.73 billion in the
reported quarter and inched past the Zacks Consensus Estimate of
$9.7 billion. On an annualized basis, Passenger, and Other revenues
grew 7% and 2%, respectively, while Cargo revenue dipped 1%.
Airlines traffic, measured in billions of revenue passenger miles,
inched up 0.3% year over year. Capacity or available seat miles
fell 1.3% while load factor (percentage of seats filled with
passengers) grew 140 basis points year over year to 85.1%.
Passenger revenue per available seat mile (PRASM) or unit revenue
rose 8% year over year, led by a 9% increase in PRASM in both
Atlantic and Pacific.
Total operating expenses, including special items, rose 11% year
over year, primarily due to restructuring expenses and higher wages
Consolidated unit cost or cost per available seat mile (CASM),
excluding fuel and special items, crept up 3.6% and CASM, including
fuel and special items, increased 12.1% year over year in the
Delta Air Lines' balance sheet continues to be strong. At the end
of June 2012, the company had $5.3 billion in unrestricted
liquidity including $3.5 billion in cash and short-term
investments, and $1.8 billion in undrawn revolving credit
The company reduced its adjusted net debt to $12.1 billion from
$12.2 billion at the end of the prior quarter. Delta has attained
approximately $5 billion of debt reduction over the past two years.
Management is on track to minimize it to $10 billion by the next
The company generated operating cash flow of $683 million in the
reported quarter while capital expenditures were $652 million.
Despite the uncertain economic growth, the company continues to
expect strong momentum in third quarter unit revenue through
capacity reductions and pricing actions.
For the third quarter, Delta Air Lines expects operating margin in
the range of 10-12% and consolidated unit cost, excluding fuel, to
grow 5-6% year over year. Additionally, the company expects
domestic flying to decrease 0-2% year over year and international
flying to decrease 3-5% year over year.
The estimated fuel price, including taxes and hedges, is
approximately $3.09 per gallon and total liquidity is projected at
$5.1 billion with capital expenditures of $400-$450 million.
Going forward, Delta expects to remain profitable as it continues
to reap benefits from the investments made to improve operating
efficiencies and customer experience. Further, the company targets
$1 billion in cost savings over the next two to three years largely
driven by its domestic fleet revamp.
We remain impressed with Delta's initiatives to improve revenue
while lowering overall cost. The company is progressing well on
improving ancillary revenues by adding new features to its services
as well as expanding new products, which are enhancing its value
On the cost side, Delta is taking several steps such as cutting
flights to less-profitable markets, retiring inefficient planes,
consolidating facilities and acquiring oil refinery to reduce
Despite these positive attributes, we remain on the sidelines due
to new pricing rules, competitive threats from
United Continental Holdings Inc.
JetBlue Airways Corp.
), its unionized workforce and heavy investments, which might weigh
on the bottom line.
We are maintaining our long-term Neutral recommendation on Delta
Air Lines. For the short term (1-3 months), the stock retains a
Zacks #2 (Buy) Rank.