Delta
(
DAL
) has reported 4% year-over-year growth in unit revenue for the
month of August. Unit revenues, also called Passenger Revenue
per Available Seat Miles (PRASM) are a critical indicator of the
profitability of an airline, and the impressive increase in the
same bodes well for Delta. The growth was a result of stable demand
for flights, particularly from the corporate sector, and higher
passenger fares. If the company is able to carry forward the
momentum in to September, then we could see good operational
performance figures in third quarter earnings report of the
company.
We currently have
a stock price estimate of $9.13 for the company
, approximately 5% above its current market price.
See our complete analysis for Delta here
Growth in top line
Consolidated Revenue Passenger Miles (
RPM
), an indicator of passenger traffic increased 0.2% y-o-y in August
for the airline, and load factor increased 0.9 points on a capacity
reduction of 0.8%. Coupled with the increase in unit revenue,
passenger revenues for the airline have registered growth in
August. This growth is a result of increasing passenger traffic on
domestic, Latin and Pacific routes, partially offset by decline in
traffic on Atlantic route which points to the effect of euro
crises, and higher passenger fares. Passenger fares have risen in
the industry on account of rising fuel prices, and the last round
of fare hikes was witnessed in mid-August when Southwest Airlines (
LUV
) increased passenger fares by $10 on a round trip on routes that
are less than 500 miles one-way, with other airlines including
Delta following suit.
However, high fuel prices impact margins
However, the airline incurred a high average jet fuel price of
$3.26 per gallon for the month of August, as crude oil (Brent)
traded in the range of $105-$116 per barrel during the month and is
holding at these levels in September so far. Thus, such high oil
prices will impact margins for the quarter.
On the whole, the better than expected increase in unit revenues
for August shall help the airline maintain its margins for the
third quarter in light of the high fuel prices; shares of Delta
rose 3.74% in trade on Wednesday on announcement of the increase in
unit revenues. And, shares of US Airways (
LCC
), which also announced 1% y-o-y increase in PRASM for August on
the same day, rose 7.37% at the end of trading on Wednesday.
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