Delta Air Lines (NYSE:DAL) managed to report a net GAAP income of $124 million owing largely to fuel hedging. Despite a 3% fall in capacity, the company saw revenues of $8.4 billion resulting in a sturdy 9% growth this quarter. The revenue figures were mainly driven by passenger revenues with little support from the cargo division. The CASM (Cost per Available Seat Mile) for this quarter increased by 6% on account of rising fuel costs and capacity reduction exercises. The revenue growth trend has been quite similar to rival US Airways (NYSE:LCC) which posted a 10.3% higher revenues this quarter. Delta’s other competitor United Continental (NYSE:UAL) is also set to post its first quarter numbers today.
Capacity Discipline to Continue
Delta Air Lines has already cut capacity by 3% this quarter. The capacity reduction plan is expected to further decrease ASMs by 1-3% both on the domestic and international front. The RASM (Revenue per Available Seat Mile) has shown tremendous growth of 15% in the Pacific region as a result of improved yield and load factor.
The company wants to leverage on the strong trend and expects to raise the Pacific capacity by 7-9% through recommencement of Detroit-Nata route and normalization of Japan capacity. Since capacity is an important driver in valuing Delta’s international operations, the sensitivity of these initiatives on valuation of Delta’s international business can be seen through the interface below.
Bullish on Demand and Operating Margins
Delta Air Lines has been witnessing strong corporate booking strength in the recent past. In the domestic segment, the company sees improved occupancy and yield factors in the next quarter. While strong order book builds confidence, it also presents an opportunity for the airline to go for another round of fare revision in case the need arises.
On the operating front, optimal hedging has benefited the company with $151 million in this quarter excepting which the company would have booked a loss. Despite hedging initiatives, the company booked additional expense of $250 million on fuel this quarter.
Going forward, the carrier expects the net fuel price inclusive of hedging impact to rise by 17 cents to $3.28/gallon for the next quarter. To counter the rising fuel bill, the carrier plans to keep a check on non-fuel expenses by improving maintenance efficiency, retiring inefficient aircraft and improving employee productivity. It is also looking to optimize the work force in accordance with the capacity reduction program by offering voluntary retirement packages. Through these cost control measures, Delta is targeting operating margins of 8-10% for the second quarter.
Our price estimate for Delta stands at $10.92, implying a premium of about 4% on the market price. We are in the process of revising the model to incorporate the latest company guidance released along with Q1 2012 financial results.