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.
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.