Capacity Expansion, Cost Cutbacks Should Lift Delta’s Results

January 16th, 2015 by Trefis Team
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Delta Air Lines

Delta Air Lines (NYSE:DAL) will announce its fourth quarter and full year 2014 results on Tuesday, January 20. The third largest network carrier in the U.S., behind American (NASDAQ:AAL) and United (NYSE:UAL), is coming off solid results in the first three quarters in which it cumulatively posted $2.2 billion in profit (excluding special items) and 7% year-on-year growth in top line. [1] In the fourth quarter, we expect Delta to continue to post strong growth in its top line on gains from capacity expansion. The carrier’s profit will likely also rise on benefits from cost cutbacks and lower jet fuel prices.

We currently have a price estimate of $45 for Delta, approximately in line with its current market price.

See our complete analysis of Delta here

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Delta Expands Capacity In The Fourth Quarter To Drive Growth

In the fourth quarter, Delta expanded its flying capacity by roughly 3.5% annually to cater to the rising demand for air travel in the domestic and Latin international markets. [2] This expansion in Delta’s capacity was fully absorbed by rising demand as the carrier’s occupancy rate (percentage of seats occupied by passengers in flights) remained stable in the quarter. This means that Delta will report higher passenger traffic in the fourth quarter, which in turn will lift its passenger revenue.

In addition, in an investor update filed in early January, Delta has forecast that its fourth quarter cargo and ancillary (consists of heads like baggage and ticket change fee) revenue will be around $1.38 billion, up from $1.2 billion in the fourth quarter of 2013. In all, higher cargo, ancillary and passenger revenue mean that Delta will post a higher top line in the fourth quarter.

Cost Cutbacks Will Expand Delta’s Operating Margin

On the margin front, Delta has forecast that its fourth quarter operating margin will expand by 400 basis points to around 12-13%. [2] We figure that lower fuel costs, as well as gains from cost-cutting measures such as domestic re-fleeting that Delta is executing, are driving this growth in its operating margin. For a sixth straight quarter, the carrier expects year-on-year growth in its non-fuel CASM to remain under 2% in the fourth quarter. Non-fuel CASM, as measured by non-fuel costs per available seat mile, is a standard metric used in the airline industry to measure an airline’s cost efficiency. Fuel costs are excluded from this metric to more accurately assess how well an airline manages the costs it can control. Delta anticipates its fourth quarter non-fuel CASM to rise at a modest rate of 1% year-on-year. [2]

This low growth in non-fuel costs, coupled with healthy top line growth, should allow Delta to post profit growth in the fourth quarter.

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Notes:
  1. Delta’s 2014 Q3 earnings form 8-K, October 16 2014, www.delta.com [↩]
  2. Delta’s investor update filed in January 2015, January 5 2015, www.delta.com [↩] [↩] [↩]