Delta (NYSE:DAL) posted $586 million in net income, excluding special items, in the second quarter earnings on higher passenger revenues.  Including special items, the airline posted a GAAP net loss of $168 million. Operating revenues for second quarter were $9.7 billion, up 6% compared to the year-ago quarter driven by a 7% increase in passenger revenue, offset by a 2% decline in cargo revenue.
Passenger Revenue per Available Seat Mile (PRASM) also increased 8.5% on a year-over-year basis. Together, the two indicate good operational performance in the quarter. Also, the airline incurred high average jet fuel price of $3.37 per gallon, excluding mark-to-market adjustments.
On the whole, the airline posted good results on strong operational performance driven by growth in passenger revenue, and offset by high fuel prices.
We currently have a stock price estimate of $11 for the airline, approximately 15% above its current market price.
Higher passenger revenues drive growth
The airline posted passenger revenues of $8.45 billion in the second quarter, up 7% on a y-o-y basis. Further, the growth in passenger revenue was highest on Pacific international routes at 20%, followed by Latin America at 8% and domestic U.S. routes at 7%, on a year-over-year basis. And the growth on Atlantic route was the lowest at 1%, reflecting the continued economic slowdown in Europe.
The airline also lowered its capacity by 1.3% y-o-y in the second quarter, without impacting the growth in passenger traffic, which increased 0.3%. As a result, load factor too increased by 1.4 points to 85.1%. Cargo revenue declined 2% to $262 million due to lower cargo yields, partially offset by higher volumes.
But fuel costs continue to weigh on margins
The airline incurred an average fuel price of $3.37 per gallon, excluding mark-to-market adjustments. On a GAAP basis, which includes mark-to-market adjustments on out-of-period hedges, the average fuel price was $3.95 per gallon. Going forward, Delta anticipates to incur an average fuel price of $3.09 and $3.05 per gallon in the third and fourth quarter of 2012, respectively.
The company has also taken a couple of other steps to manage fuel costs. First, it acquired the trainer refinery from ConocoPhillips (NYSE:COP) that it anticipates will provide $300 million in annual fuel savings 2013 onward. The refinery is expected to start production in the last quarter of 2012. Second, Delta will lease 88 Boeing 717s from Southwest Airlines to reduce the number of fifty-seating regional aircraft in its fleet. This will help drive fuel efficiency along side improved customer experience. The jets will start arriving by mid-2013.
On the whole, the remainder of 2012 looks good for the airline with rising passenger traffic particularly on Latin American and Pacific international routes, coupled with lower anticipated fuel costs. However, any steep escalation in fuel price or worsening of the euro-crises with global consequences can offset our current assessment and impact growth of the airline over the remainder of 2012.Notes: