Delta’s Earnings Will Likely Take Off on Gains from Capacity Expansion and Cost Cuts

by Trefis Team
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Delta Air Lines
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Delta Air Lines (NYSE:DAL) will announce its second quarter earnings Wednesday, July 23. The airline is coming off a good first quarter in which, in spite of many weather related flight cancellations, it posted strong growth in its results. We figure Delta will continue to post strong growth in its revenues in the second quarter on gains from capacity expansion, which is driving growth in its passenger traffic. Additionally, in an investor update filed earlier in July, Delta said that it expects its operating margins to improve substantially in the second quarter, on gains from its cost reduction measures. All in all, we figure the carrier will likely post a solid second quarter.

We currently have a stock price estimate of $38.17 for Delta, marginally ahead of its current market price.

See our complete analysis of Delta here

Delta’s Q2 Passenger Revenues Will Rise on Capacity Expansion

In the second quarter, backed by stable demand for air travel in the domestic market and many international routes, Delta raised its flying capacity by about 3% annually. [1] This decision to expand flying capacity proved beneficial – not only did the carrier’s passenger traffic rise but its occupancy rates (percentage of seats occupied on flights) also improved. This clearly illustrates that demand environment for air travel is conducive to growth and Delta capitalized on the same by expanding its flying capacity on selected routes.

Additionally, Delta’s second quarter unit revenue – amount collected from each passenger for a seat per mile of flight – also rose by about 6% annually driven by higher passenger fares. ((Delta’s July 2014 investor update, July 18 2014, www.delta.com)) This again illustrates that the demand for air travel is enabling airlines to not only expand their flying capacities but also raise their passenger fares. Driven by this rise in Delta’s passenger traffic, flying capacity and fares, we figure its second quarter passenger revenues will likely rise on a year-over-year basis.

Cost Reduction Initiatives Will Likely Expand Delta’s Margins

On the margin front, Delta forecasts its second quarter operating margins to expand to around 14-16% from 11% in the prior year quarter, driven by cost controlling measures. [1] Towards the end of 2012, Delta launched many cost cutbacks to limit growth in its non-fuel costs. These measures included domestic fleet restructuring and employee productivity improvements, among others. These measures remain underway currently, and in our opinion, will be the key factors driving Delta’s margin expansion in the second quarter. On gains from these cost reduction measures, Delta anticipates its second quarter unit costs (operating costs per unit flying capacity) to remain nearly flat compared with the year ago period. Thus, as the carrier’s top line will likely grow strongly and its costs will likely grow modestly, its second quarter profits are bound to rise.

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Notes:
  1. Delta’s July 2014 investor update, July 18 2014, www.delta.com [] []
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