Delta Air Lines (NYSE:DAL) will be reporting its first quarter results this Wednesday along with rival US Airways (NYSE:LCC). The airline is expected to show better revenues vis-à-vis prior quarter on grounds of improved load factor, capacity discipline and fare hikes. However, the profitability is going to depend on Delta’s ability to manage its fuel cost exposure.
The company’s $12 billion fuel bill in 2011 pushed it to look for alternative cost control measures. Acquisition of a refinery from ConocoPhillips (NYSE:COP) seems to be an innovative activity by Delta. However, the practicality of generating cost benefits through this backward integration exercise is still being questioned. It will be interesting to know more details about this acquisition during the earnings release.
Capacity Optimization Measures
Delta Air Lines grew overall system capacity marginally in 2011 and the Pacific region turned out to be the only notable area of expansion. The conservative stance on capacity has resulted in 3.2% fall in ASMs (Available Seat Miles). The international markets led the reduction measures with 4.3% fall in capacity this quarter. The capacity caution in the international markets is driven by Atlantic region witnessing an 8.8% fall this quarter. Further, in the Latin American segment, the regional carriers have slipped by a massive 14.5% in the first quarter. Delta is considering shifting this capacity from domestic and transatlantic region to high potential Latin and Pacific markets. It will be interesting to see how this corporate restructuring exercise has impacted the bottom-line.
Non-Fuel Cost Control Accompanied With Adoption of Fuel Efficient Fleet
Delta Air Lines has been trying to compress the fuel bill through addition of fuel efficient aircraft to its fleet. The company plans to replace the retiring aircraft with five MD-90 aircraft in 2012 which will result in better fuel efficiency and lower unit costs. Further, the addition of 100 Boeing 737-900ER scheduled over 2013-18 promises significant savings from lower fuel burn and lower maintenance costs. Delta expects the maintenance reductions in advance of those deliveries to begin in late 2012.
At the same time, the company is equally paying attention towards non-fuel costs and employee productivity. (See: Delta Looks to Structural Changes to Fight Rising Fuel Costs). The carrier intends to improve employee productivity levels through resolution of labor representation issues. Additionally, technology investments would aid in enhancing efficiencies in crew systems.
Efforts Towards Regional Carriers
Delta has entered into code sharing agreements with other airlines that feed traffic to its route system by serving passengers in regions not directly covered by Delta. During this quarter, Delta announced a code sharing agreement with WestJet on flights within United States and Canada. However, this quarter saw a considerable dip in the capacity as well as load factor for regional carriers on the international front. To be more precise, the load factor in Latin region through regional carriers fell by 2.4 points this quarter. Since Delta has been shifting its own capacity in the Latin markets, a part of this fall may be attributed to cannibalization of its own services with that of regional carriers. As Delta continues its capacity enhancement exercise in Latin markets, the revenues from regional carriers is expected to fall further.
We have a Trefis price estimate of $10.92 for Delta Air Lines’s stock, about 5% above 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 Q1 2012 financial results.