Delta (NYSE:DAL) posted strong growth in revenue and net income in the third quarter on the back of higher passenger fares and lower fuel costs. The carrier also managed its capacity optimally during the period resulting in 0.3 point y-o-y increase in load factor to 86.4%. Revenue increased 1% y-o-y to $9.9 billion and net income rose 91% y-o-y to $1 billion in the three months that ended September 30, 2012. 
Higher passenger fares offset lower passenger traffic to drive growth in top line
The carrier maintained a conservative stance in the third quarter. It lowered its capacity on Atlantic and domestic U.S. routes, increased its capacity on Latin American routes and maintained a near level capacity on Pacific international routes. Overall, its available seat miles (ASMs) declined by 2% y-o-y in the third quarter. This capacity decline impacted passenger traffic for the airline for the period reflected by a 1% y-o-y decline in revenue passenger miles (RPMs). However, this decline in passenger traffic was more than offset higher passenger fares during the period. Passenger revenue per available seat mile (PRASM) increased 3% y-o-y in the third quarter.  This resulted in an overall rise in passenger revenue for Delta.
Lower fuel costs result in strong growth in net income
Fuel costs also declined 23% y-o-y or $660 million in the third quarter. The carrier incurred an average fuel price of $2.71 per gallon, on a GAAP basis. This compares to $3.09 per gallon that the carrier incurred in the third quarter of 2011. This decline in fuel costs enabled Delta to post 91% y-o-y or $498 million increase in net income to approximately $1 billion. However, excluding the impact of mark-to-market adjustment, the average fuel price was $3.14 per gallon. 
In the third quarter, the carrier also started jet fuel production at its Trainer refinery complex which it had acquired from Phillips 66 in June earlier this year. The company expects the plant to be fully operational in the fourth quarter. The in-house refining of crude oil to produce jet fuel is expected to generate $300 million in annual savings for Delta from 2013. 
All in all, Delta posted strong growth in earnings in the third quarter driven by higher passenger fares and benefiting from mark-to-market adjustments in fuel cost accounting.
We currently have a stock price estimate of $10.95 for Delta, approximately 10% above its current market price. We are in the process of incorporating the third quarter earning results and shall update our analysis shortly.Notes: