Airlines Weekly Notes: Alaska and Delta Report Traffic Results For May

Last week, Alaska Air (NYSE: ALK) and Delta (NYSE: DAL) released their traffic results for the month of May and year-to-date 2015. While the two airlines continued to add capacity to maintain their market share, their operational efficiency during the month suffered. This is expected to create a drag on their second quarter passenger yields and margins.

Alaska Air Group

Given its aggressive capacity expansions, Alaska Air grew its flying capacity by 12% ((Alaska Air’s Operational Results for May 2015, 2 June, 2015, www.alaskaworld.com)) on a year-on-year basis during May. This resulted in a sharp rise of more than 10% in the airline’s passenger traffic during the month. However, the rapid capacity expansions weighed heavily on the carrier’s operational efficiency as the airline’s passenger load factor (percentage of seats occupied) fell by 120 basis points to 84.5% during the month.

The Seattle-based airline aims to increase its flying capacity by 10.5% in the second quarter to meet its full year target capacity increase of 8%. The airline expects to continue expanding its Seattle capacity at a rate of 10% to battle the capacity expansions by Delta. We figure that these rapid capacity additions will continue to create a pricing pressure for the airline, pulling down its top-line growth.

– Our price estimate for Alaska Air stands at $69 per share, approximately 5% above its current market price.

– We estimate the airline to post revenue of $5.7 billion in 2015, compared to its consensus revenue of $5.6 billion.

– We forecast the airline to report earnings of $5.78 per share in 2015, compared to its consensus earnings of $6.01 per share.

See our complete analysis of Alaska Air Group here

Delta Air Lines

Despite facing adverse competition from Gulf airlines and smaller carriers, Delta grew its international capacity by 4.3% ((Delta’s Operational Results for May 2015, 2 June, 2015, www.delta.com)) on a year-on-year basis driven by new routes in Latin American and Atlantic markets. The airline’s overall system capacity rose by 4% year-to-date, in line with the company’s capacity guidance for the year. Further, the airline’s passenger traffic also increased 2.7% compared to the previous year on the back of capacity expansions. However, this led to a dip in the airline’s load factor from 86.5% in May 2014 to 85.4% in May 2015. Also, the consolidated passenger unit revenue (PRASM), a measure of unit revenue, fell 5.5% on a year-on-year basis during the month, due to lower domestic yields and foreign exchange pressure and lower surcharges in international markets.

As a result, the Atlanta-based airline revised its unit revenue guidance from a 2-4% decline to a 4-5% decline for the second quarter. Delta continues to expect its June quarter revenue to rise by 2% on a 3% increase in capacity. Driven by the low fuel prices and continuous cost control measures, the airline aims to achieve an operating margin of 16-18% in the second quarter. For the full year, the airline plans to keep its non-fuel unit costs growth to less than 1% on a year-on-year basis, while realizing fuel cost savings of over $2 billion from the lower fuel costs.

– We have a price estimate of $48 for Delta, 11% ahead of its current market price.

– We estimate the airline to post revenue of $41.4 billion in 2015, compared to its consensus revenue of $41.5 billion.

– We forecast the airline to report earnings of $4.41 per share in 2015, compared to its consensus earnings of $4.72 per share.

See our complete analysis of Delta Air Lines here

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