Delta Airlines (NYSE:DAL) will announce its first quarter 2013 earnings on Tuesday, April 23. The carrier is coming off a highly profitable 2012 in which it posted net income of over $1 billion on higher passenger fares supported by a stable demand environment. 
In the first quarter, it continued to hike its fares on several routes to drive top-line growth. However, the aggressive pricing stance cut into its passenger traffic which will partially offset growth from higher fares. Additionally, margins in the first quarter will come under pressure from higher non-fuel costs driven by product investments aimed at improving the on-board experience of customers. On the bright side, Delta’s profits will benefit from lower interest payments resulting from lower debt. In all, Delta will likely post a good first quarter.
We currently have a stock price estimate of $15.65 for Delta, approximately in-line with its current market price.
Passenger Revenues Will Likely Grow, But Cargo Revenues Are Expected To Remain Weak
In the first quarter, Delta continued to focus on growing its top-line through increased corporate share and higher passenger fares. As a result, its unit revenue – a measure of passenger fares and the extent to which planes are filled – increased by 5.5%, 5% and 2% in January, February and March, respectively, on a year-over-year basis.    The comparatively lower unit revenue growth in March was a result of an overly aggressive pricing stance and fewer close-in bookings caused by government austerity (See Delta’s Outlook Is Stable Despite March Weakness).
The carrier also adopted a cautious capacity stance, lowering its flying capacity on domestic U.S. and Atlantic international routes, in line with the demand environment on these routes. This impacted its passenger traffic, which declined by 0.6% in the first quarter, compared to the year-ago period.  However, the growth from revenue initiatives will likely more than offset the impact from lower passenger traffic to drive growth in passenger revenues.
In addition, Delta forecasts its revenues from cargo transport and ancillary sources like extra baggage fee, ticket rescheduling charges and access fee to premium lounges to decline in the mid-single digit percentage range to $1.1-$1.15 billion in the first quarter from $1.2 billion in the corresponding period last year.   This indicates that the demand from the global cargo markets continues to remain weak.
Margins Under Pressure From Non-Fuel Costs
Delta forecasts operating margin of 2.5-3.5% for the first quarter.  This compares to 4.5% operating margin it recorded in the first quarter of 2012.  The lower expected margin is a result of more investments in products aimed at improving the flying experience of customers. The carrier anticipates its non-fuel costs to rise by 5-6% y-o-y in the first quarter.  However, savings realized from structural cost initiatives that include fleet restructuring, staffing efficiency, maintenance redesign and distribution channel changes will stabilize non-fuel costs of the carrier by the second half of 2013. In all, Delta anticipates to save $600 million in 2013 and $1 billion annually 2014 onward in non-fuel costs through these cost-reduction measures. 
In addition, the Trainer refinery continued to increase production output since the impact from Superstorm Sandy in October last year. The higher jet fuel output from the refinery will save on fuel costs in the first quarter. For full year 2013, Delta anticipates to realize $300 million in fuel cost savings from the Trainer refinery operations. 
Lower Interest Payments Will Boost Profits
Also, Delta’s profits in the first quarter are expected to benefit from lower interest payments driven by declining debt. During 2009-12, the carrier reduced its debt from $17.2 billion at the end of 2009 to $12.7 billion at the end of 2012. Accordingly, interest payments declined from $1.29 billion in 2009 to $1.04 billion in 2012.   In 2013, it anticipates to make interest payments of around $850 million and targets to reduce debt to $10 billion by the year end. Notes:
- Delta’s 2012 10-K, February 13 2013, www.delta.com [↩] [↩]
- Delta’s traffic report for January, February 4 2013, www.delta.com [↩]
- Delta’s traffic report for March, March 4 2013, www.delta.com [↩]
- Delta’s traffic report for March, Form 8-K, April 2 2013, www.delta.com [↩] [↩] [↩] [↩] [↩]
- Delta’s 2012 Q1 10-Q, April 25 2012, www.delta.com [↩] [↩]
- Delta’s annual investor day presentation, December 17 2012, www.delta.com [↩] [↩] [↩]
- Delta’s 2011 10-K, February 10 2012, www.delta.com [↩]