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Delta's June Passenger Unit Revenue Up 2.5%, Q2 View Bullish

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Shares of Delta Air LinesDAL have impressed lately. The stock has been up 20.8% in the last three months, handily outperforming the Zacks categorized Transportation Airline industry's gain of 9.7%.

The company received a further boost when it reported impressive June traffic data and unveiled a bullish view on key metrics for the second quarter of 2017. In fact, this Atlanta, GA-based carrier stated that consolidated traffic, measured in revenue passenger miles (RPMs), increased 2.8% in the month (on a year-over-year basis) to approximately 20.83 billion. The upside was driven by 3.9% rise in domestic RPMs.

Consolidated capacity (available seat miles/ASMs) also inched up 1.8% to 23.52 billion in the month. Moreover, load factor or the percentage of seats filled by passengers increased 80 basis points (bps) to 88.5%. This was primarily because traffic growth outweighed the capacity expansion, thereby leading to packed planes.

Additionally, the airline recorded an 82.8% on-time performance and 99.9% completion factor (mainline). The brightest spot of the carrier's June performance was with respect to passenger revenue per available seat mile (PRASM: a measure of unit revenue) that increased 2.5% (ona year-over-year basis).

In fact, at the end of the first six months, Delta generated consolidated RPMs of 105.5 billion (up 1.3 % year over year) and ASMs of 124.1 billion (flat year over year). Also, load factor was 85%, up 110 bps.

Q2 View

Delta's strong PRASM performance in June and May (when the metric increased 3.5%) have raised hopes for this Zacks Rank #1 (Strong Buy) carrier, displaying quarterly unit revenue growth for the first time in the second quarter since the fourth quarter of 2014. You can see the complete list of today's Zacks #1 Rank stocks here .

The carrier now expects the metric to increase approximately 2.5% in the second quarter, despite storms in Atlanta during April that forced the carrier to cancel multiple flights. Moreover, the bullish second-quarter PRASM view implies that the metric is likely to come in at the upper end of its previously guided range of 1% to 3%.

In fact, Delta is not the only carrier to have issued bullish unit revenue forecast. The likes of American Airlines Group AAL and JetBlue Airways Corporation JBLU have also unveiled encouraging projections with respect to the metric for the second quarter of 2017.

Apart from the bullish passenger unit revenue view, Delta also raised the lower end of its guidance for pre-tax margin. Currently, the airline expects the metric to be in the range of 18% to 19% (previous guidance was in the band of 17% to 19%).

With the company inking multiple labor deals, higher labour costs might hurt its bottom-line in the second quarter. In fact, cost per available seat mile, (non-fuel; including profit sharing) is anticipated to increase in the band of 6% to 8% in the quarter, mainly owing to higher labor costs. Also, average fuel price per gallon is projected to be in the band of $1.65 to $1.70. System capacity is expected to be up approximately 0.5% on a year-over- year basis.

We note that labor deals are in vogue in the airline space. Not only Delta, but other players in the space like Southwest Airlines LUV have signed deals with various labor groups over the past few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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