The second largest U.S. airline
Delta Air Lines Inc.
(
DAL
) has surprised us by reporting first quarter 2012 adjusted loss of
5 cents per share, in line with the Zacks Consensus Estimate. Fare
hikes and ongoing cost-cutting measures fully offset surging fuel
prices.
Adjusted loss per share excludes gains of 18 cents from fuel
hedging and 2 cents from other streamlining actions. Including
these gains, earnings per share jumped to 15 cents in the quarter
from the loss of 38 cents in the year-ago quarter.
Revenue
Revenue increased 9% year over year to $8.4 billion in the
reported quarter outpacing the Zacks Consensus Estimate of $8.3
billion. On an annualized basis, Passenger, and Other revenues
climbed 10% and 2%, respectively, while Cargo revenue dipped
2%.
Airlines traffic, measured in billions of revenue passenger
miles, inched up 1% year over year. Capacity or available seat
miles fell 3% while load factor (percentage of seats filled with
passengers) grew 330 basis points year over year to 79.7%.
Passenger revenue per available seat mile (PRASM) or unit revenue
rose 14% year over year, led by a 22% spike in PRASM in Atlantic
and a 15% hike in Pacific.
Operating Expenses
Total operating expenses, including special items, rose 2% year
over year, primarily due to higher fuel expenses and higher
ancillary business expenses.
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 6% year over year in
the reported quarter.
Liquidity
Delta Air Lines' balance sheet continues to be strong. At the
end of March 2012, the company had $5.7 billion in unrestricted
liquidity including $3.9 billion in cash and short-term
investments, and $1.8 billion in undrawn revolving credit
facilities.
The company reduced its adjusted net debt to $12.2 billion from
$12.9 billion at the end of 2011. 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 year.
The company generated operating cash flow of $947 million in the
reported quarter while capital expenditures were $350 million.
Guidance
Despite the rising fuel prices, the company again expects second
quarter unit revenue to improve from the year-ago level on the
strong travel demand.
For the second quarter, Delta Air Lines expects operating margin
in the range of 8-10% and consolidated unit cost, excluding fuel,
to grow 3-4% year over year. Additionally, the company expects both
domestic and international flying to decline 1-3% year over
year.
The estimated fuel price, including taxes and hedges, is
approximately $3.28 per gallon and total liquidity is projected at
$5.8 billion, with capital expenditures of $400 million.
Delta Air Lines expects second quarter and fiscal 2012 to remain
profitable with substantial improvements from the last year on the
back of improving revenues, capacity cuts, higher ticket prices and
better customer satisfaction.
Our Take
Notwithstanding higher fuel prices and the threat of recession
looming large over Europe, 2012 will likely mark the third
consecutive year of profitability for the company. Delta's efforts
to reduce operating expenses, including fuel and non-fuel costs,
and its healthy revenue initiatives such as upgrading seats and
installing WiFi are expected to generate higher revenues and
profits.
Despite these positive attributes, we remain on the sidelines
due to new pricing rules, competitive threats from
United Continental Holdings
Inc.
(
UAL
),
Southwest Airlines
(
LUV
) and
JetBlue Airways Corp.
(
JBLU
), its unionized workforce and heavy investments, which might weigh
on the bottom line.
Consequently, we are maintaining our long-term Neutral
recommendation on the stock. For the short term (1-3 months), Delta
Air Lines retains a Zacks #3 (Hold) Rank.
DELTA AIR LINES (
DAL
): Free Stock Analysis Report
JETBLUE AIRWAYS (
JBLU
): Free Stock Analysis Report
SOUTHWEST AIR (
LUV
): Free Stock Analysis Report
UNITED CONT HLD (
UAL
): Free Stock Analysis Report
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