The second largest U.S. airline
Delta Air Lines Inc.
(
DAL
) expects to earn a profit of $800 million for the full fiscal year
amid rising fuel prices and a slow moving economy. Fuel expenses
would rose 30% from the last year, resulting in $3 billion of extra
fuel cost.
The company had already generated a profit of $429 million in
the first nine months. Excluding special items, adjusted earnings
would be $1.1 billion for the full year, as stated by the company
at its investor meet in New York. Operating margin is expected to
grow as much as 8% in the ongoing quarter, up from the previous
projection of 5-7%.
Delta Air Lines is taking several initiatives to lower its
overall cost including fuel price. The company is successfully
passing the increased fuel cost to customers in the form of fare
hikes. Delta increased its ticker prices ten times over the year.
Another way to reduce fuel cost is by cutting capacity. Delta Air
Lines is trimming its consolidated capacity by 4-5% in the current
quarter, with 3-4% in domestic flights and 4-5%
internationally.
Moving ahead into the next year, the company expects solid
growth on the back of improved travel demand, which is expected to
grow 6-8%, as well as a cost cutting strategy.
Delta is planning cautiously on capacity cuts, which is expected
to be down 2-3% year over year. The company intends to reduce
domestic capacity by 1-3% and lessen the number of less
fuel-efficient aircraft. In the trans-Atlantic route, the company
with its partners, Air France KLM and Alitalia, will reduce
capacity by 7-8% in 2012. Latin America capacity is expected to
grow up to 2% on the back of demand in Brazil and Central America.
Pacific capacity would grow by 1-2% year over year.
Further, Delta is trying to slash its non-fuel cost in a number
of ways and expects it to be modestly up this year from the last.
The company is removing 70 less fuel-efficient planes from its
fleet by the end of this year and the other 70 planes by the end of
next year. Instead, Delta will add 100 fuel-efficient
Boeing Co.
(
BA
) 737-900 ER jets at the end of 2012 and continue through 2018.
This will lower the maintenance cost by $600-$750 million,
including $250 million by the end of this year.
The company is also resizing its workforce through 2,000
voluntary staff reductions and is consolidating facilities in
Atlanta, Minneapolis, Memphis and Cincinnati. These initiatives are
expected to save more than $80 million annually.
Hence, 2012 will be the consecutive third year of being
profitable despite the fact that fuel prices remain at high levels
and Europe faces threats of a recession. The Zacks Consensus
Estimate projects earnings per share of $1.23 in the year and $2.22
for the next. The current quarter estimate is 26 cents per
share.
Besides, Delta Air Lines, competing strongly with
United Continental Holdings Inc.
(
UAL
),
AMR Corporation
(
AMR
) and
Southwest Airlines Co.
(
LUV
), is making solid progress on reducing its debt, which will in
turn improve its balance sheet. The company lowered its net debt to
$14 billion as of September 30 and expects it to be $13 billion by
the end of the year. Delta also looks to reduce its debt to $10
billion by the end of 2013.
We currently have a long-term Neutral recommendation on Delta
Air Lines. The stock retains the Zacks #3 (Hold) Rank for the short
term (1-3 months).
AMR CORP (
AMR
): Free Stock Analysis Report
BOEING CO (
BA
): Free Stock Analysis Report
DELTA AIR LINES (
DAL
): Free Stock Analysis Report
SOUTHWEST AIR (
LUV
): Free Stock Analysis Report
UNITED CONT HLD (
UAL
): Free Stock Analysis Report
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