Delta (NYSE:DAL) is expected to announce its second quarter earnings Wednesday, July 25.  The company is from a strong previous quarter where it posted net income of $124 million on growth in passenger revenue aided by good operational performance and gains from fuel hedging. We anticipate the airline to continue its good performance in Q2, partially offset by higher jet fuel prices.
We currently have price estimate of $11 for Delta, in-line with its current market price.
Proactive jet fuel cost management
The airline incurred average jet fuel price of $3.11 per gallon in the previous quarter. We anticipate this to rise in the second quarter and stand in the range of $3.25 to $3.35 per gallon, which is likely to weigh on the already thin margins.
However, the airline has taken certain proactive measures that will ensure higher protection from fuel price rises in coming months.
Firstly, it is replacing five of its retiring aircraft with MD-90 aircraft in 2012, and plans to induct 100 Boeing 737-900ER and 18 Boeing 787 aircraft over 2013-18. These planes offer higher fuel efficiency and will result in fuel cost savings.
Secondly, Delta has acquired a crude oil refinery from ConocoPhillips (NYSE:COP) that can save up to $300 million in annual fuel costs.  Jet fuel production is expected to begin at the facility in the third quarter of the current year and result in 2012 fuel savings of approximately $100 million. Such backward integration is a first in the airline industry and, if successful, will not only provide significant fuel cost savings for Delta, but also ensure fuel supply at its hubs in LaGuardia and JFK.
Strong operational management
The monthly operating performance reports released by the airline reflect good operational management, indicated by increases in passenger revenue per available seat mile (PRASM) in each of the three months of the second quarter, on a year-over-year basis.    PRASM increased by 11%, 6% and 8% during April, May and June, respectively, in 2012, on a yearly basis. Load factor also increased for each of the three months aided by reductions in capacity.
Further, the airline shifted capacity on its international routes from Atlantic to Pacific in the second quarter indicated by a decline in available seat miles (ASM) on Atlantic and a corresponding increase in ASM on Pacific. This has been a direct result of sustained economic growth in China and other emerging Asia-Pacific countries and the economic slowdown in Europe.Notes:
- Delta Air Lines Announces Webcast of June Quarter 2012 Financial Results, July 18 2012, news.delta.com [↩]
- Delta Subsidiary to Acquire Trainer Refinery Complex, April 30 2012, news.delta.com [↩]
- Delta reports operating performance for April, May 2 2012, news.delta.com [↩]
- Delta reports operating performance for May, June 4 2012, news.delta.com [↩]
- Delta reports operating performance for June, July 3 2012, news.delta.com [↩]