The second largest U.S. airline
Delta Air Lines Inc.
) expects third quarter profits to be solid despite the rising fuel
prices and uncertain economic growth.
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The company expects corporate bookings to climb 9% year over year
despite the capacity reduction of 1-3% in the third quarter.
Passenger unit revenue (or passenger revenue per available seat
miles) is expected to grow 3-4% year over year thanks to the
growing business travel demand and flight expansion in the New York
market. The additions of new features to its services as well as
introduction of new products are also expected to boost revenue.
Delta expects operating margin in the range of 9-11%, down from the
previous expectation of 10-12%. Consolidated unit cost, excluding
fuel, is still estimated to grow 3-4% year over year. The company
now estimates fuel price to be $3.23 per gallon for the ongoing
quarter, up from the previous forecast of $3.09 per gallon.
Delta is leading the industry in managing fuel cost through fare
hikes and capacity cuts. Hedging strategies are also the effective
tool undertaken by Delta to combat fuel prices. To cut the fuel
costs further, the company has become the first carrier to enter
into the fuel business by acquiring Trainer refinery in
Though the refinery will incur a modest loss in the third quarter,
it will start generating profits from the fourth quarter. The oil
refinery will likely save $300 million in fuel costs annually. In
order to generate more savings, Delta is looking to buy cheaper
Bakken crude from North Dakota to feed its refinery at an
equivalent or lower price than that of West Texas Intermediate.
Currently, the refinery uses crude from the North Atlantic.
The Zacks Consensus Estimate for Delta remains unchanged at $1.00
over the last 7 days, but it fell eight cents in the last 30 days
for the third quarter. The estimate represents a significant growth
of 9.34% from the year-ago quarter.
Further, Delta Air Lines, which competes strongly with
United Continental Holdings Inc
Southwest Airlines Co
), continues to have a healthy balance sheet. The company expects
to reduce $10 billion in net debts by the end of the next year and
has already achieved $5 billion reduction in last two years. The
company expects to exit the third quarter with $5 billion in
We are currently maintaining our long-term Neutral recommendation
on Delta Air Lines. For the short term, the stock retains a Zacks
#3 (Hold) Rank.