Delta Air Lines (NYSE:DAL) displayed solid operating performance as its first quarter profits jumped to $213 million from a mere $7 million in the prior year period, despite many weather-related flight cancellations. In January and February, the carrier cancelled approximately 17,000 flights due to winter storms.  This is twice the number of flights it cancelled last year due to harsh weather. The carrier’s first quarter revenues also rose by 5% annually to $8.9 billion as it expanded flying capacity to take advantage of the stable demand environment for flights. In our opinion, it is commendable that Delta could post this growth in its results despite revenue loss of nearly $90 million due to severe winter weather and shift of Easter holiday traffic into April. 
In the coming months, we anticipate Delta to maintain this growth momentum in its results as it will benefit from its Virgin Atlantic joint venture. During its earnings release, Delta’s CEO, Richard Anderson, also reiterated the company’s long term goals of 10-12% annual operating margins, 10-15% annual earnings growth and 15% return on invested capital (ROIC).  These targets were unthinkable five to six years back when the carrier was battling heavy losses and debt. But, helped by consolidation, disciplined capacity addition and steady growth in demand for flights, Delta has improved its results such that these targets seem not only achievable and but also quite reasonable.
We currently have a stock price estimate of $35.95 for Delta, approximately in line with its current market price. We are in the process of incorporating first quarter results and shall update our analysis shortly.
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Higher Flying Capacity & Solid Cost Performance Drove First Quarter Results
In the first quarter, Delta expanded its flying capacity by 2% annually. Helped by a solid demand environment in the domestic U.S. market and on Latin international routes, the carrier’s first quarter passenger traffic also rose by 4% annually.  This higher passenger traffic (driven by capacity expansion) drove growth in Delta’s first quarter revenues. In the second quarter, the carrier plans to continue to add capacity, reflecting the growing demand for air travel.
Additionally, for another quarter, Delta controlled the growth in its non-fuel unit costs to under 2%, when measured on a year-over-year basis. We figure such impressive cost performance is due to the structural cost controlling measures that Delta launched around a year-and-half back. At the same time, the carrier is also focused on controlling other parts of its cost base. Through operation of the Trainer refinery and fuel price hedging, Delta is controlling its fuel costs and by reducing debt, it is reducing its interest costs. In the first quarter, driven by lower debt, the carrier reduced its interest expenses by $34 million. 
Second Quarter Outlook
Backed by lower costs, Delta expects its operating margin to be around 14-16% in the second quarter.  Top line growth driven by capacity expansion will also play an important role in achieving these impressive margins. All in all, Delta posted a solid first quarter and looks set to maintain its performance in the second quarter.Notes: