Delta (NYSE:DAL) will announce its third quarter earnings Wednesday, October 24.  The airline has posted strong growth in revenue and operating income in the first half of the year driven by increasing demand for travel on Latin and Pacific international routes and higher passenger fares. Revenue was $18.1 billion, up 7.4% y-o-y, and operating income was $516 million, up 32.6% y-o-y, in the six months that ended June 30, 2012. 
In the third quarter, the carrier adopted a more conservative capacity stance reflected by a y-o-y decline in available seat miles (ASMs). This impacted its passenger traffic for the period. However, total passenger revenue is likely to increase in Q3 on a y-o-y basis due to higher passenger fares. The airline has increased passenger fares on several routes in 2012 on account of rising fuel prices.
All in all, Delta’s third quarter earnings will be driven by higher passenger fares and offset by lower passenger traffic. We currently have a stock price estimate of $10.95 for the airline, nearly 10% above its current market price.
Higher passenger fares to drive earnings growth
Delta has hiked passenger fares multiple times in 2012 driven by high crude oil prices. Crude oil (Brent) price increased from $95 per barrel at the end of the second quarter to remain above $110 per barrel for the most part of the third quarter, prompting the airline to continue hiking passenger fares.  This is reflected by increases of 4.5%, 4.0% and 0.5% in passenger revenue per available seat mile (PRASM) in July, August and September 2012, respectively, on a y-o-y basis.    Higher passenger fares will add to the growth in passenger revenue and drive earnings growth for Delta in the third quarter.
But lower passenger traffic may impact earnings
However, the carrier lowered its capacity in the third quarter due to lower demand on all of its routes except for Latin and Pacific international. Overall system ASM, an indicator of capacity, declined 3.1%, 0.8% and 0.6% in July, August and September, respectively, on a y-o-y basis.    As a result, passenger traffic was impacted with declines in July and September and a marginal rise in August. Lower passenger traffic will likely impact Delta’s Q3 earnings.
Fuel costs will remain comparable to year-ago levels
Delta has indicated that it will incur an average jet fuel price of $3.15 per gallon in the third quarter.  This compares to $3.09 per gallon incurred in the third quarter of 2011.  The marginal rise in average fuel price coupled with fewer gallons of fuel burned due to lower capacity indicates that fuel costs in Q3 are comparable to that of the year-ago levels.Notes:
- Delta Air Lines Announces Webcast of September Quarter 2012 Financial Results, October 17 2012, news.delta.com [↩]
- 2012 Q2 10-Q, www.delta.com [↩]
- Oil price performance in the last YTD, www.moneyweek.com [↩]
- Delta Reports Financial and Operating Performance for September 2012, Oct 2 2012, news.delta.com [↩] [↩] [↩]
- Delta Reports Financial and Operating Performance for August 2012, Sept 5 2012, news.delta.com [↩] [↩]
- Delta Reports Financial and Operating Performance for July 2012, August 2 2012, news.delta.com [↩] [↩]
- 2011 Q2 10-Q, www.delta.com [↩]