Superstorm Sandy Will Impact Delta’s Q4 Earnings

by Trefis Team
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Delta (NYSE:DAL) will announce its fourth quarter earnings on Tuesday, January 22. The carrier forecasts profits between $200 million and $250 million for the fourth quarter compared to $379 million in the year-ago period. [1] Delta suffered an estimated $50 million loss from Superstorm Sandy, which impacted profits not only by disrupting flight operations but also by damaging the Trainer refinery’s supply pipelines and limited the distribution of jet fuel from the refinery.

On the bright side, the fourth quarter earnings will be boosted by higher unit revenue and passenger traffic and Delta’s ongoing cost-cutting measures like domestic fleet restructuring. Also, for full year 2012, Delta’s net income is expected to be much higher than that in 2011. Its net income crossed $1 billion in the nine months ended September 30 2012 compared to $854 million for full year 2011. [2] [3]

We currently have a stock price estimate of $11.50 for the airline, approximately 15% below its current market price.

See our complete analysis of Delta here

Higher load factor, passenger traffic and unit revenue will drive top-line growth

Delta continued to lower its flying capacity in the fourth quarter to raise the percentage of occupied seats in its flights. The carrier was able to successfully raise its load factor (the percentage of occupied seats in a flight) by 1.8 points, 1.1 points and 1.8 points in October, November and December, respectively, on a year-over-year basis. [4] Passenger traffic for the carrier also increased driven by strong growth on Pacific and Latin international routes, partially offset by the decline in traffic on Atlantic international and regional domestic U.S. routes.

Passenger unit revenue (a measure of passenger revenue per unit of flying capacity) also increased for each of the three months of the fourth quarter on a y-o-y basis. These increases in load factor, passenger traffic and unit revenue will drive top-line growth for Delta in the fourth quarter.

Ongoing domestic fleet restructuring will help profits

Additionally, the ongoing cost-cutting measures will aid earnings growth for the company. Domestic fleet restructuring is a major part of these measures. The carrier is reducing the number of less efficient 50-seat regional jets (RJs) in its domestic fleet by replacing them with two-class RJs and narrow body jets like Boeing 737 that are more efficient and customer friendly. Delta targets to reduce the number of 50-seat RJs in its fleet to 125 by 2015, down from 474 in 2009. This alone will reduce its maintenance costs by around $400 million over the next three years. [5]

Delta is also working at reducing its distribution costs by increasing delta.com’s share in total bookings, restructuring agent commissions and reducing merchant fees. It is also engaged in improving employee productivity through technology initiatives.

Trainer refinery operations will impact Q4 profits

However, earnings growth from cost-cutting measures and higher passenger traffic will be impacted by the loss from Trainer refinery operations. Delta had acquired the crude oil refining complex in June 2012 along with its supply pipelines that transport jet fuel in northeastern U.S., including the carrier’s New York hubs of LaGuardia and John F. Kennedy airports. Superstorm Sandy damaged Trainer’s pipeline infrastructure, impacting Delta’s jet fuel distribution from the refinery.

From 2013 onward though, the refinery is expected to save $300 million in annual fuel costs, and by the end of 2013, it will produce around 40,000 barrels of jet fuel per day, providing for a significant portion of Delta’s fuel requirements. [5] Additionally, the refinery will improve Delta’s fuel management by providing leverage in fuel purchases and thus will generate further savings. Overall, in the long term, the Trainer refinery will partially offset the impact of rising crude oil prices.

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Notes:
  1. DELTA AIR LINES ANNOUNCES $379 MILLION QUARTERLY PROFIT AND $1.2 BILLION ANNUAL PROFIT, EXCLUDING SPECIAL ITEMS, January 25 2012, www.delta.com []
  2. Delta 2012 Q3 10-Q, www.delta.com []
  3. Delta 2011 10-K, www.delta.com []
  4. Operating performance report for October, November and December 2012, www.delta.com []
  5. Form 8-K, December 12 2012, www.delta.com [] []
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