Delta’s Outlook Is Stable Despite March Weakness

April 9th, 2013 by Trefis Team
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DAL
Delta Air Lines
    Quick Take 

  • Delta recently cut its first quarter growth forecast for unit revenue (a measure of passenger fares and occupancy rates) to 4%-4.5% per year, from 4.5%-5.5% per year.
  • This cut in forecast was driven by lower demand for Delta’s flights in March.
  • However, we believe the growth outlook for the carrier is stable as its profit forecast for the first quarter is largely unchanged.
  • Additionally, Delta is well positioned to weather minor falls in demand for flights due to its cost saving initiatives and international equity partnerships, which provide potential for top line growth.

Delta Airlines (NYSE:DAL) announced lower than anticipated growth in its March unit revenue on April 2, due to lower demand brought about by the carrier’s aggressive pricing stance and fewer close-in bookings driven by government austerity. The carrier’s unit revenue, a key measure of passenger fares and the extent to which planes are filled, grew by a mere 2% per year in March, compared to a growth of 5.5% per year in January and 5% per year in February. Low growth in March caused Delta to cut its first quarter growth forecast for unit revenue to 4%-4.5% per year, from 4.5%-5.5% per year indicated earlier. [1] [2]

Following this cut in growth forecast, the carrier’s stock declined by nearly 12% through the end of the week. However, we believe that Delta’s outlook is stable, which is supported by the fact that the carrier’s profit forecast remains largely unchanged. We currently have a stock price estimate of $15.65 for Delta, just ahead of its current market price.

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See our complete analysis of Delta here

Unit Revenue Growth Forecast For Q1 Cut Due To Lower Demand

In March, Delta’s aggressive stance on raising passenger fares cut down its demand for flights. This lower demand was exacerbated by fewer last-minute bookings from government contractors and clients who are feeling the pinch of declining government spending. These last-minute business bookings are crucial for airlines as they are full fare bookings which help raise yield levels. This indication for lower demand for flights driven by government spending cuts, impacted stocks of other airlines as well, including United (NYSE:UAL), US Airways (NYSE:LCC), Alaska Airlines (NYSE:ALK) and JetBlue (NASDAQ:JBLU). Overall, Delta’s occupancy rate (percentage of seats occupied in a plane by revenue paying passengers), declined by 1.4 points in March, compared to the year ago period, due to lower demand. [1]

Additionally, growth in Delta’s March unit revenue was impacted by temporary inefficiencies experienced by the carrier, during the roll out of its new revenue management system.

Profit Outlook Remains Largely Unchanged

On the bright side, despite the cut in unit revenue growth forecast, the carrier maintained its first quarter forecast for operating margin to lie between 2.5% and 3.5%. [1] This is because the airline realized higher than anticipated cost savings from its structural cost initiatives that include fleet restructuring, maintenance redesign and improving staffing efficiency through technology initiatives. The carrier currently anticipates its non-fuel unit costs to increase by 5%-6% per year in the first quarter, compared to an increase of 6%-7% per year anticipated earlier. [1]

In the long run, fuel savings derived from Trainer refinery operations and revenue gains derived from international equity partnerships, particularly the Virgin Atlantic-Delta joint venture, position Delta well to weather impacts from minor falls in demand for flights.

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Notes:
  1. Form 8-K – Delta’s March traffic and first quarter outlook, April 2 2013, www.delta.com [↩] [↩] [↩] [↩]
  2. Form 8-K – Delta’s presentation at JP Morgan aviation conference, March 4 2013, www.delta.com [↩]