Delta Meets, Guidance Firm - Analyst Blog

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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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CASM , DAL , JBLU , LUV , UAL

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