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Delta Sees Strong Annual Profit - Analyst Blog

Posted
12/15/2011 2:15:00 PM
By: Zacks.com
Referenced Stocks:AMR;BA;DAL;LUV;UAL

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).


 
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