Delta Air Lines Inc.
), the second largest U.S. airline, is slated to release its second
quarter 2012 earnings on July 26. The current Zacks Consensus
Estimate is pegged at 67 cents for the second quarter, representing
a substantial 56.35% increase from the year-ago quarter.
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Looking at surprises, Delta had average positive surprise of 9.68%
in the trailing four quarters. In the year-earlier quarter, the
company had surprised us by reporting 2.27% downside from our
Over the past two months, fuel price, the major threat to the
company's profitability, has dropped to a certain extent, making
airline operations less expensive.
First Quarter Flashback
Though Delta's adjusted earnings per share were at par with the
Zacks Consensus Estimate, earnings on a GAAP basis climbed year
over year on the back of fare hike actions, cost-cutting measures
and fuel hedging gains that offset surging fuel prices.
Revenue improved on the back of strong unit revenue, particular in
Atlantic and Pacific. Airlines traffic grew slightly from the
year-ago quarter with decline in capacity (or, available seat
miles) and increase in load factor (percentage of seats filled with
Operating expense rose mainly due to higher fuel expense and
ancillary business expenses.
On the liquidity front, the company has attained approximately $5
billion of debt reduction over the past two years to $12.2 billion
at the end of first quarter. Management is on track to minimize
debt to $10 billion by 2013.
(Read our full coverage on this earnings report:
Delta Meets, Guidance Firm
Second Quarter Outlook
Last month, Delta Air Lines announced that it foresees $155 million
in losses from fuel hedging strategies in the second quarter. The
company now estimates fuel price to rise to $3.37 per gallon from
the previous forecast of $3.28 per gallon due to hedge losses that
were settled in May and June.
Delta Air Lines was 70% hedged for the second quarter at a jet fuel
price of $3.05-$3.40 per gallon using collars and call spreads. As
a result, the company expects to record operating losses in the
quarter with negative 1% margin after accounting for the hedges and
other special charges.
However, on a non-GAAP basis, Delta still 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 1-2% year over year.
Further, second quarter unit revenue is expected to grow 8% year
over year thanks to growing business travel demand and flight
expansion in the New York market. The addition of novel features to
its services as well as introduction of new products will also
contribute to revenue increase.
Agreement of Analysts
Estimates for the second quarter have been trending downward over
the last 30 days with 10 out of 13 analysts making downward
revisions. None of them moved in the opposite direction.
The analysts turned negative as Delta expects to record operating
loss due to fuel hedging losses. Though the drop in fuel prices of
late has helped the carrier to a certain extent, it indicates a
slowing economy and consequent fall in global air travel demand.
The falling fuel cost also increases the hedge losses.
For fiscal 2012, estimates reflect a positive bias over the last 30
days, as 8 out of 13 covering analysts have revised their estimates
upward while 3 made downward revisions.
The analysts remained impressed with Delta's initiatives to improve
revenue while lowering overall cost. The company is progressing
well on improving ancillary revenues by adding new features to its
services as well as expanding new products, which are enhancing its
value and profitability.
Moreover, Delta Air Lines believes 2012 will remain profitable with
substantial improvements from last year on the back of growing
revenues, capacity cuts, higher ticket prices and better customer
Magnitude - Consensus Estimate Trend
The magnitude of revisions for the second quarter remained stable
over the last 7 days at 67 cents but went down by 13 cents over the
last 30 days.
The Zacks Consensus Estimate for fiscal 2012 is $2.36, down 3 cents
over the last 7 days but was up by a nickel over the last 30 days.
Despite the uncertain economic conditions, we expect Delta to
exhibit strong revenue and earnings on the back of improving
services, new product launches and reduced operating expenses -
fuel and non-fuel costs. Additionally, the company is expanding
networks in both domestic and international markets as well as
de-leveraging its balance sheet in order to brighten long-term
Nevertheless, we remain on the sidelines due to fuel price
volatility, competitive threats from major rivals like
United Continental Holdings Inc.
Southwest Airlines Co.
), as well as unionized workforce and heavy investments, which
might weigh on the bottom line.
We are currently maintaining our long-term Neutral recommendation
on the stock. For the short term, the stock retains a Zacks #2