Delta Airlines‘ (NYSE:DAL) profits jumped to $685 million in the second quarter, from a loss of $164 million in the year ago period driven by a sharp drop in jet fuel prices.  According to the U.S. Energy Information Administration, jet fuel spot prices dropped by around 14% – from $3.22 per gallon in February to $2.77 per gallon in June – driven in part by a weak outlook for global economic growth.  This significant drop in fuel prices reduced Delta’s second quarter fuel costs by $710 million annually, lifting its profits single-handedly. 
Second quarter margins of Delta also benefited from its structural cost initiatives which include fleet restructuring, maintenance redesign, staffing efficiency and distribution channel changes. Gains from these measures tempered the growth in the carrier’s non-fuel unit operating costs to 2.5% annually in the second quarter, from mid-to-high single-digit growth rates that were seen in the last few quarters. In the second half, Delta expects to keep the growth in its non-fuel unit operating costs at under 2% on gains from these structural cost measures.  This will be a big achievement given that fuel costs, which constitute a third of the carrier’s total operating costs are not under its control. So, the low growth in its non-fuel operating costs will go a long way in shoring up its profits in the second half of 2013.
We currently have a stock price estimate of $19.10 for Delta, around 15% below its current market.
Steady Demand And Virgin Atlantic Deal
Delta’s good second quarter performance was also supported by a stable demand environment, as 1% y-o-y hike in the carrier’s flying capacity led to an equal rise in its passenger traffic. Imposing confidence in continuation of such a stable environment, Delta forecast a growth of 1-3% in its flying capacity on a year-over-year basis in the third quarter.  This is in stark contrast to the last few years, which saw a steady decline in the carrier’s flying capacity.
During the quarter, Delta also acquired 49% stake in Virgin Atlantic with the objective of forming a joint venture in the important U.S.-U.K. air travel market before the end of 2014. This joint venture will position Delta-Virgin alliance as the second largest player in this lucrative market behind American Airlines-British Airways alliance.
Declining Debt and Lower Interest Payments
Separately, Delta also paid down its adjusted net debt to $10.2 billion at the end of the second quarter, from $11 billion at the beginning of the quarter.  This lowered the carrier’s interest payments by $43 million annually in the quarter, boosting its profits. Since 2009, Delta has lowered its adjusted net debt by over $6 billion, and going forward it targets to reduce its adjusted net debt to $7 billion by 2017.  This declining debt load on the carrier will aid its profit growth by way of decreased interest payments.
US Airways Earnings
Separately, US Airways (NYSE:LCC) second quarter profits excluding special items also increased 1% y-o-y to $324 million driven by lower jet fuel prices, offset in part by a non-cash provision for income tax. On a GAAP basis, profits of the carrier dipped marginally to $287 million due to merger related costs.
Earlier in July, shareholders of US Airways approved the merger with American Airlines with 99.8% of shareholders voting in favor of the deal.  In its second quarter earnings filing, the company reaffirmed its expectations of closing the merger transaction in the third quarter.
We currently have a stock price estimate of $18.60 for US Airways, marginally below its current market price.
Capacity Expansion Led Growth
In the second quarter, US Airways raised its flying capacity by 3.4% annually, leading to 5.6% y-o-y increase in its passenger traffic.  The carrier added a number of routes to its network during the quarter, including resumption of flights to Shannon, Ireland from Philadelphia and launch of daily service to Sao Paulo, Brazil from Charlotte.
Looking ahead, the carrier will continue with its strategy of expanding flying capacity to drive growth in passenger traffic and top line. For full year 2013, US Airways anticipates to increase flying capacity by around 3.5% from 2013. In the first half, the carrier raised its capacity by over 2% annually. Notes:
- Delta’s Q2 2013 earnings form 8-K, July 24 2013, www.delta.com [↩] [↩] [↩] [↩] [↩]
- U.S. Gulf-coast kerosene-type jet fuel spot price, July 29 2013, www.eia.gov [↩]
- Delta’s Q1 2013 earnings form 8-K, April 23 2013, www.delta.com [↩]
- US Airways reports second quarter profits, July 24 2013, www.usairways.com [↩] [↩]
- US Airways Q2 2013 earnings form 8-K, July 24 2013, www.usairways.com [↩]