Delta Air Lines‘ (NYSE:DAL) fourth quarter revenues and profits rose sharply on higher passenger traffic driven by capacity expansion. The carrier’s revenues rose by 6% annually to $9.1 billion, and its profits excluding special items were $558 million in the fourth quarter. 
On a GAAP basis, Delta’s fourth quarter profits soared to $8.5 billion on reversal of a tax valuation allowance, from a mere $7 million in the prior year period.  This huge gain is the result of a change in Delta’s expectations to remaining profitable in the coming years. Accordingly, the carrier booked a non-cash tax benefit in the fourth quarter that will be used to offset future cash tax payments. Excluding the impact from this non-cash tax gain and other one-time items, for full year 2013, Delta’s profits rose to $2.7 billion, from $1.6 billion in 2012.  In our opinion, these non-GAAP figures which exclude one-time items better reflect Delta’s underlying actual operational performance.
We currently have a stock price estimate of $32.40 for Delta, approximately in line with its current market price.
Capacity Expansion Drives Growth In Passenger Revenues
In the fourth quarter, backed by stable demand environment for flights on domestic U.S. and Latin American international routes, Delta hiked its flying capacity by 3% annually. Higher flying capacity raised the carrier’s fourth quarter passenger traffic by 2% annually.  Coupled with higher unit revenues – the amount collected from passengers per seat for a mile of flight – Delta’s top line rose strongly in the fourth quarter.
Cost Controlling Measures Expand Operating Margins
The carrier’s profits in the fourth quarter benefited not only from this growth in its top line but also from expanded margins driven by its cost controlling measures. A year back, Delta initiated multiple cost controlling measures to curtail growth in its operating costs. The carrier replaced older, less cost efficient airplanes in its fleet with new, more efficient ones. It raised employee productivity through the use of technology and reduced distribution costs by directing greater bookings through delta.com. Through these measures and others, Delta controlled the rise in its non-fuel costs to expand its margins. For full year 2013, gains from these measures brought down growth in Delta’s non-fuel unit costs to 2% on a year-on-year basis. 
In comparison, driven by higher passenger traffic and higher passenger fares, the carrier’s top line rose at a higher rate of 3% year-on-year. Additionally, due to lower crude oil prices Delta’s fuel costs declined significantly in 2013, compared to 2012. All in all, higher growth in top line compared to non-fuel unit costs and lower fuel costs helped expand the carrier’s operating margin to 9% in 2013, from under 6% in 2012. 
Near Term Outlook
Looking ahead, Delta expects to maintain growth in its non-fuel unit costs to under 2% on a year-on-year basis. We figure this will help the carrier retain its margin expansion gains achieved in 2013. Additionally, apart from capacity expansion driven top line growth, Delta’s revenues in 2014 will receive boost from its joint venture with Virgin Atlantic Airways. (See Delta And Virgin Atlantic Get JV Approval For Lucrative New York-London Market)Notes: