Riding on favorable corporate and leisure demand trends, Delta Air Lines (NYSE:DAL) witnessed a healthy y-o-y growth of 10% in its passenger unit revenues in FY 2011. We expect Delta to continue the momentum in 2012 through sustained capacity caution as the carrier strives to right-size system capacity to match expected demand. The airline is geared for a strong March-end quarter and is currently forecasting double-digit year-on-year growth in unit revenues through the quarter. Below, we discuss the FY 2012 capacity trends at Delta in more detail.
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Capacity cuts roll onto FY 2012
The past year, Delta showed sustained capacity caution while maintaining schedule flexibility in order to shift to high capacity potential markets and adjust quickly to changing demand dynamics. The carrier grew overall system capacity marginally in 2011 and Pacific turned out to be the only notable area of expansion. Delta is maintaining a “curt conservative stance on capacity” in FY 2012 with about 2%-3% y-o-y planned reduction in system available seat miles. Meanwhile, peer United Continental (NYSE:UAL) is keeping capacity flat “with a downward bias” for 2012.
While the cuts will be spread across the board at Delta, international markets will witness more scrutiny. In Q1 2012, the carrier plans to cut international seat miles by 4%-6% versus 2%-4% domestically. Delta’s domestic strategy is focused on right‐sizing capacity while successfully implementing the LGA hub growth to achieve top position in New York.
Reduced capacity in the Transatlantic, while Latin seat miles could be up
Capacity caution on the international side of the network is driven by cuts in transatlantic capacity. Delta will reduce Transatlantic capacity by 7%-8% in 2012 by optimizing the network in coordination with JV partners and by cancellation of underperforming routes. Transatlantic capacity rationalization has benefited Delta’s unit revenues in the region, which are up 17% for the month of January as compared to prior year and the airline continues to see strong trends through the March quarter.
Delta’s outlook for Latin America remains positive for the March quarter with both load factors and yields showing strength. During FY 2011, Delta forged partnerships with major Latin American carriers such as Aeromexico, GOL and Aerolineas Argentinas to get access to Latin America’s largest aviation markets presenting major organic growth opportunities for the carrier. The past year, Latin America registered the highest unit revenue growth across the system at Delta. Geographic proximity and economic ties between the U.S. and Latin America are promoting the region as an attractive market for US carriers to expand into. Delta is guiding to keep Latin capacity flat to up 2% y-o-y in FY 2012.
We have a Trefis price estimate of $10.36 for Delta Air Lines’s stock, about 5% behind the market price on the last close. We are currently in the process of updating our model to incorporate the latest company guidance released along with FY 2011 financial results.
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