Delta Air Lines (NYSE:DAL) will announce its first quarter earnings Wednesday, April 23. The airline is coming off a very good 2013 where it posted profits of $2.7 billion (excluding special items) and led other airlines in a strengthening U.S. airline industry.  In the first quarter, we anticipate Delta to continue to post strong growth in its revenues on higher passenger traffic driven by capacity expansion. The carrier will also likely post strong growth in its profits despite negative impact from severe weather conditions during the quarter. In an investor update filed earlier this month, Delta mentioned that it cancelled 17,000 flights during the first quarter due to inclement weather conditions. This lowered its revenues and profits by an estimated $90 million and $55 million, respectively.  We figure that despite this negative impact from severe weather, Delta’s first quarter profits will rise on higher operating margins driven by top line growth and cost controls.
We currently have a stock price estimate of $35.95 for Delta, around 5% ahead of its current market price.
Gains From Expansion In Flying Capacity Will Lift Delta’s Passenger Revenues
In the first quarter, backed by a stable demand environment in the domestic air travel market and on Latin international routes, Delta raised its flying capacity by nearly 2% annually. This decision to expand flying capacity proved beneficial as not only the carrier’s passenger traffic rose but its overall occupancy rates (percentage of seats occupied on flights) also rose by 1.5 points to 82.7%.  This clearly illustrates that the demand environment for air travel is conducive to growth and Delta realizing the same expanded its flying capacity in the first quarter by an appropriate extent on carefully selected routes.
Additionally, Delta’s first quarter unit revenue – amount collected from each passenger for a seat per mile of flight – also rose by around 3-4% annually driven by higher passenger fares.  This again illustrates that the demand for air travel is enabling airlines to raise their passenger fares along side their flying capacities. We figure driven by this rise in Delta’s passenger traffic, flying capacity and fares, its first quarter passenger revenues will rise on a year-over-year basis.
Cost Controlling Measures Will Expand Margins And Profits
On the margin front, Delta forecasts its first quarter operating margin to expand to around 6.5-7.5%, from 3.5% in the prior year quarter, driven by cost controlling measures.  Around a year-and-half back, Delta initiated multiple cost controlling measures, which included fleet restructuring and employee productivity improvements. For instance under fleet restructuring, Delta is replacing old, aging and less cost efficient airplanes in its fleet with new ones that are more cost efficient. In this way, fleet restructuring is lowering Delta’s costs to expand its margins and profits. In all, we figure the significantly higher first quarter operating margin forecast by Delta will grow its profits despite negative impact from severe weather.Notes: